Yesterday Sterling hit its lowest trade weighted basis since 1848. We are now starting to see some of the first impacts of this as Tesco reports supply problems of household staples like PG Tips and Marmite. Unilever the supplier have seen costs rising near 15% since the Brexit vote and Sterling’s fall. The lack of Marmite on the shelves will not be creating headaches for too many this morning but is very indicative of the type of problems and costs a weak pound presents and we will see more of down the line.
The strange thing is the UK economy is actually performing quite well. Growth in Q3 has been tracked at 0.4%, UK Manufacturing was recently shown to be growing at its fastest pace in 2 years and the FTSE 100 has smashed all-time highs. So why is Sterling down? The weak pound is ironically the cause of these last two points but the UK as a net importer does not overall benefit from a weak pound. Essentially we buy more from overseas than we sell so a weaker currency does more damage than good.
Another contentious issue is whether or not Parliament will have a vote on the Brexit. Yesterday Sterling rose in the morning as it looked like Parliament may get a vote before falling in the afternoon when it was confirmed it would have a debate instead. Such jitters and knee-jerk reactions are great examples of the kind of market Sterling now occupies acting more like an Emerging Market currency than the once stable staple of many a safe haven investment.
The Bank of England has previously had a mandate to keep Inflation (the rate at which prices rise) at 2%. This could now all go out the window as the Bank of England expect Inflation to go up owing to the weaker pound. Rising Inflation is also bad for the pound in another way since it means any investors in the UK will ‘lose’ more of the value of that investment over time as prices rise faster than perhaps they had hoped.
Next week is more news for the UK with the latest Unemployment data. The rest of this week is fairly light on new information but the main trigger on Sterling rates is likely to be further headlines. I feel there could be further losses to come for Sterling and urgently suggest any clients looking to buy a currency with the pound contact us to make some plans and be kept up to date. You will need all the help you can to catch this falling knife.
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