Philosophy, politics and economics
Investors seem to be getting more comfortable – or at least less anxious – about the fact that Brexit means Brexit (which, as everyone knows, it does). If control of immigration is seen to be more important than Britain’s continued membership of the EU’s single market, the government may feel the need to sacrifice the later in order to maintain the former. This “hard Brexit”, as the media like to call it, will have consequences for the UK economy. Unfortunately nobody can any more than guess what they might be and the uncertainty has weighed on the pound for four months.
However, last week there was a degree of lightening-up among investors. UK inflation moved up to within half a percentage point of its target at 1.5%, and pre-bonus earnings growth accelerated to 2.3%. Unemployment was steady at 4.9%, as close to full employment as can reasonably be expected. That being the case, and with five months to go until Brexit proper kicks off, investors could find no new motivation to sell the pound. Sterling took second place to the South African rand but shared silver with the US dollar. It took back a cent and a quarter from the euro and strengthened by an average of 0.6% against the other doze most actively-traded currencies.
The unedifying spectacle of the third US presidential candidates’ debate on Tuesday night had no visible effect on the US dollar. Opinion polls point to a fairly easy win for Ms Clinton but history shows how often the pollsters can get it wrong. Investors are unclear whether a win for the charismatic and personable free market capitalist or the chic and disciplined democrat would be better – or worse – for the US economy and the dollar.
What they are clear about is that US interest rates will go up in December. At the beginning of this week a clutch of Federal Reserve bosses fed that expectation. One of them went as far as to say that there could be three increases before the end of next year. The notion of a December rate hike is now so solidly established that the dollar failed to make any fresh progress on the back of the Fed’s comments. Even so, in the month to date it shares the lead with the Australian dollar and the rand, having picked up seven and a half cents against sterling.
We have reached the point in the month where the statisticians have just about run out of data. Almost the only figures to relieve the tedium this week will be the first estimate of UK economic performance during the third quarter of the year – the three months immediately following the referendum. Analysts expect growth to have slowed but not ground to a halt. A quarterly expansion of 0.3% is pencilled in.
The good news
Sterling has had A Good Week, proving that it serves a higher purpose than simply as a piñata for the speculative bears. Some brave souls have even begun to argue that the devaluation it has suffered already (an average loss of -16.2% since Brexit Eve) means that a hard Brexit is now fully priced in and further selling would not be justified.
The bad news
Whilst selling the pound at its current level might be unjustified there are precious few analysts out there recommending it as a buy.
Sarah, Senior Account Manager at Moneycorp
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