One Year On, the Pound Can't Shake Brexit Blues
June 23 2017 - 12:29AM
Dow Jones News
By Christopher Whittall and Riva Gold
Political anxiety has dragged on the British pound in the year
since the Brexit vote. But now a shaken power structure in
Westminster and a central bank divided by economic cross currents
have investors debating whether the beleaguered currency has
further to fall.
Last June, the U.K. voted to leave the European Union, and the
pound tumbled 11% in a matter of hours.
Since then, political uncertainty and concerns that leaving the
EU will dent economic growth have continued to weigh down the
pound. Despite rising slightly this year, it currently trades at
around $1.27, compared with $1.50 before the referendum result.
Many feel it has further to fall but are reluctant to place
large bets given the uncertain political and central bank outlook
in the U.K. Inconclusive elections earlier this month opened up the
possibility of the U.K. maintaining closer-than-expected ties with
the EU, but also fueled worries the prime minister will be seen as
a less reliable interlocutor, increasing the chances the talks
could end without a deal.
Meanwhile, as the bulk of the developed world grapples with
accelerating growth and signs of tepid inflation, the U.K. is
experiencing inflationary pressures and signals of a slowdown in
the economy.
Weak growth and building inflation have made life complicated
for Bank of England policy makers, who are increasingly at odds
over whether to raise interest rates in response to higher
inflation.
"I think the U.K. will face a headwind to growth later this year
as Brexit concerns strangle things," said Alan Wilson, investment
manager at State Street Global Advisors.
Investors say that politics, and specifically Brexit, will be
the major driving force behind the pound's long-term path.
The U.K. opting to maintain a close relationship with the EU
could see sterling swing higher, they say. Some investors believe
the recent election result has made that outcome more likely. The
ruling Conservative Party, which had campaigned for a clean break
with the EU, lost its majority in parliament and is now reliant on
other parties to pass legislation.
But Britain's two main political parties say they remain
committed to Brexit. Many still think sterling will suffer as the
Brexit negotiations move forward.
"Sterling hasn't bottomed yet," said Marc Chandler, global head
of currency strategy at Brown Brothers Harriman, predicting it
could eventually fall to parity with the dollar. "Brexit will make
the U.K. smaller and weaker."
Over the nearer term, the pound's trajectory will largely depend
on how the Bank of England addresses the simultaneous rise in
inflation and slowdown in economic growth.
U.K. consumer prices climbed in May at the fastest annual rate
in almost four years, with a weak pound leading to higher import
prices.
Economic growth held up well in the latter half of 2016, defying
the dire predictions of many analysts. But growth slowed in the
first quarter of the year on weak consumer spending. Some
economists believe that could be a sign of things to come.
Researchers at industry trade group Institute of International
Finance forecast quarterly U.K. growth will slow to near zero this
year as businesses put off investment decisions and consumers are
hit by declines in real wages. Brexit negotiations are likely to be
tough and uncertainty will remain high throughout, they argue.
Inflation-targeting central banks typically raise interest rates
to tamp down on price rises. Higher rates would typically boost the
currency, as investors are encouraged to buy higher-yielding
sterling-denominated assets.
But the increase in U.K. consumer prices is mainly down to the
weak currency boosting import prices rather than rising wages and
an expanding economy. The BOE cut interest rates and boosted its
bond-buying stimulus programs following the Brexit vote to support
the economy, and policy makers are now wary of lifting rates in a
way that could stifle growth.
Communications from Bank of England officials reveal this
conflict. The BOE's rate-setting monetary policy committee voted to
hold rates steady at record lows last week. But three out of the
eight-member committee voted for a rate rise, up from one person at
the previous meeting.
Andreas König, head of foreign exchange in Europe for Pioneer
Investments, says it is hard to find any reason to bet on the pound
rising over the longer term due to the U.K.'s economic position and
the uncertainty over Brexit. But he is wary of betting on its
decline given he thinks the BOE's recent comments show it will
intervene verbally to prop up the currency.
"Lower sterling makes sense fundamentally, but from a
risk-reward perspective it's not very attractive," he said.
Others are still betting on declines. Bearish bets against the
pound have increased for a third week, according to CFTC Data, with
net speculative positions on the currency remaining in negative
territory at all times since the vote. Many believe the lack of
clarity over the U.K.'s relationship with the EU will continue to
cloud the picture.
"It's difficult to see sterling making significant gains until
the political uncertainty here is cleared and we can see a clearer
path to how Brexit negotiations will work themselves through," said
Simon Derrick, chief currency strategist at BNY Mellon.
Write to Riva Gold at riva.gold@wsj.com and Christopher Whittall
at christopher.whittall@wsj.com
(END) Dow Jones Newswires
June 23, 2017 00:14 ET (04:14 GMT)
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