I must admit to being fairly pessimistic about the Pound’s value going into September. August had brought with it a terrible run of economic data and a number of political alarm bells that forced Sterling into multi-year lows against its major currency counterparts. As far as I could see, short term, there was very little the month of September could bring that could give Sterling holders any hope. But sure enough, a little bit of magic from the Bank of England, hinting that higher returns on investment for Sterling holders (via an interest rate hike) may be just around the corner, suddenly the Pound seems to be a far more attractive prospect for international investors.
It has been a splendid month so far with Sterling having gained nearly 5% against the US Dollar and 4% against the Euro over the last 3 weeks. The question is, can the Pound break through the next key resistance levels? Or will Brexit uncertainty once again drag Sterling back down to multi-year lows before 2017 comes to an end?
The table below shows the movements for a number of currency pairings in the last 3 weeks:
|Currency Pair||% Change||Difference on £200,000|
I am of the strong opinion that Sterling remains considerably undervalued with the markets still potentially pricing in the worst possible outcomes both economically and politically for the UK, should Britain’s negotiators fall short of a beneficial deal from the Brexit talks. Naturally it is far better to plan for the worst and avoid any bad surprises. I guess this would explain all the calls for parity on GBPEUR by major investment institutions only a few weeks ago.
This theory was reflected in yesterday’s trading. As chief negotiators from Brussels shared their beliefs that Theresa May bares very little chance of fulfilling her Brexit promises, Sterling’s value remained very much in the balance for most of the morning.
Reports suggested that PM May outlined the contents of her speech and the Cabinet left in general agreement as to what the UK can propose as a means to break the deadlock with their chief EU negotiating counterparts.
Strength and unity is what May has been calling for for a long time now. Clarity and commitment from UK leaders is what the EU and the currency markets have been waiting for, for just as long.
With today’s speech in Florence, PM May can provide all of the above and could well dictate Sterling’s value for the foreseeable future. She is expected to announce what the UK is willing to provide as financial compensation to withdrawing from it’s commitments to the Eurozone. This has been the first obstacle that has seen Brexit talks stall so far. Should the figure fall within the same ball park as to what is expected by the EU we could well see Sterling strengthen once more. If however the initial reaction from Europe is that of disappointment, those holding the Pound should brace themselves for heavy losses.
The next round of Brexit talks are set for the 25th of September. The €20bn figure rumoured falls a long way short of the €100bn being branded around within EU circles when Brexit talks initially started.
A “No Deal” with Europe is one of the worst possible outcomes for Sterling as far as the markets are concerned. Given we are flirting with near 3 month highs against the Euro, those looking to buy the single currency may wish to take advantage of these levels rather than gambling on fruitful Brexit talks. It may well be a long time before Sterling reaches these heights once more if things should take a turn for the worst this afternoon.
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