Last week the pound hit $1.286 and €1.16.
Wednesday 6 July was the date. It’s worth remembering.
Here’s why – and I’ll probably end up with egg on my face for saying this, because there’s so much that can still go wrong.
But I’m going to stick my neck out and say:
“That was the low”…
Leave won the referendum, but Remain is still in power
The volatility in the pound that we’ve seen in the past month is quite easy to explain.
In the autumn and winter of last year the pound was – shall we say – reasonably priced. It was in the high $1.50s against the dollar and in the €1.30s against the euro. Then the referendum came onto the horizon.
Sterling sold off gradually, but incrementally, to about $1.38 and €1.22. With a few days to go before the referendum, it looked like Remain would win. The bookies certainly thought so. We got a sizeable rally in just a few days to $1.51 and €1.32.
Then, of course, Leave won – and quite convincingly so. The majority was 1.3 million on a 72% turnout. The markets weren’t expecting that; few were. The surprise exacerbated the volatility. And we got the sell-offs that we are all now very aware of.
The political upheaval of the next few days only made things worse. First, Cameron resigned. Then Osborne didn’t. Then Farage stood down. Meanwhile, the mob began calling for Corbyn’s head, but he wouldn’t go. Then Gove sabotaged the heir apparent, Boris Johnson – or did he sabotage himself? We will find out in due course.
Then, for a few moments, it seemed like the hitherto-almost-unknown Andrea Leadsom might be in with a shout of being prime minister, but she was shut out. And now, after a few weeks which nobody will forget in a hurry, we have Theresa May.
Leave may have won the referendum, but Remain is still in power.
Why the conditions are perfect for a low in the pound
I said a couple of weeks ago that the pound cannot stage any meaningful rally until we have some clear leadership in place with a discernible strategy. Now we have the leadership. Over the next few days, we will get an idea of what the strategy will be. It will start with who May appoints – we’ll find out more about that later today, I understand.
This is a real opportunity, and I hope and pray she gets the decisions right. Please, Theresa, do not go with the bland and the beige; ignore the good company men; veer away from the “won’t-rock-the-boaters”.
Let’s have a principled, visionary chancellor who can bring simplicity and transparency to our tax code, instead of a fiddler and a tinkerer. A really bold appointment would be somebody like Steve Baker, who understands monetary theory and the inequality that recent fiscal and monetary policies have created.
And in planning, let’s have someone who can bring genuine reform to our archaic and restrictive planning laws, unlike the current preserver of the status quo that is Brandon Lewis, who doesn’t even understand the link between credit and house prices.
This is a time for bold decisions not defensive ones, though I expect we’ll get the latter. This is politics after all.
Nevertheless, we will get appointments. The markets will react. Most of all they will like the fact that someone is now in charge and that stability can return. As policies begin to be laid out, these will be taken as further signs of stability.
Rather as the pound began to slowly recover in the days after the coalition government began to take shape, filling the power vacuum that was left after the general election in May 2010, so will it this time.
A lot depends on the decisions that get taken, of course, and how we eventually negotiate our release from the EU, but the conditions in which sterling can start to stage a meaningful rally – the one I suggested we might see if Britain votes to leave the EU – are slowly starting to take shape. Then, of course, there’s the possibility that, out of the EU, our economy does rather well – which it will, if, when faced with decisions, we take the free trade options. Sterling will like that too.
Markets don’t like political instability, particularly currency markets. They like to know who’s in charge and, roughly, what they’re about. That’s what we will soon get.
The next big hurdle for the pound to clear
One of the hurdles for a sterling rally, of course, is the Bank of England governor, Mark Carney. On the Wednesday after the referendum, Carney killed the rally that had just got underway by talking about interest rate cuts.
Carney was given quite a ticking off by MP Jacob Rees-Mogg for what he saw as his failure to retain a neutral stance during the Brexit vote. He won’t have liked that. Unlike his predecessor Mervyn King, who has been calm and positive, I get the impression Carney may be more intent on being proved right in his bearish forecasts than anything else.
He’s due to speak tomorrow. We’ll see what he says. Let’s hope he doesn’t kill this rally stone dead as well (we’re up 3c off the lows already).
Otherwise, I reckon that fair value for sterling is, roughly, somewhere near the $1.50 mark. Against the euro I’d say €1.40. These targets are achievable in the not-too-distant future – perhaps even this year. But if nothing else, the first piece of the jigsaw is now in place.
Category: Market updates