Sterling exchange rates have been volatile recently when compared to previous times. Sterling now sits close to the lowest levels seen against the single currency since September 2017, and since March 2017 against the dollar. GBP/EUR interbank rates have now dropped 3 cents against the euro in the last 7 days, showing how much the world view on the pound is changing right now.
|Currency Pair||% Change (Month)||Difference on £200,000|
The pounds value has been on a downward trend for the last few months, ever since PM May officially resigned. This is attributed to building concerns that the next PM would not accept the current deal on Brexit and would prefer to re-open the negations in the effort to get a better deal. Boris Johnson won the Conservative Party leadership contest to become UK Prime Minister last month. He has since commented on Brexit promising to leave the EU on 31st October “no ifs or buts”. PM Johnson has called for the removal of the backstop relating to the Irish border, which has been one stopping point and is something that the EU deemed as "unacceptable."
Mr Johnson formed his government and conducted a cabinet reshuffle appointing former home secretary Sajid Javid as chancellor and Dominic Raab as foreign secretary. Mr Johnson’s appointments into government were broadly all supporters of the leave campaign with a number of former cabinet members who had strongly opposed a no-deal Brexit, either resigning or being sacked.
All this political uncertainty continues to cause movement on the pound. UK ten-year bonds, how governments generally raise money, were sold last week at close to a record low yields of 0.79% as investors seek safe assets and expect falling interest rates in the UK. Generally, there is a real risk that if the UK does not conduct Brexit in a well managed fashion a number of highly regarded financial institutions have suggested a recession could well follow. The UK National Institute of Economic and Social Research even warned last week that there is a one-in-four chance the UK is already in recession, referring to pending data to confirm for the current period of time. The IMF has also warned that a disorderly Brexit posed a threat to global growth.
This recent drop in the pounds value has been followed by more political uncertainty around Brexit over the weekend following PM Boris comments that he was "turbo-charging" preparations for a no-deal Brexit on 31st October.
Michael Gove, a top aide in Government, wrote in the Sunday Times that the government was now “working on the assumption” the talks with the EU would fail.
"The British pound started weakening sharply today, with the market awaking to the reality of a new UK government, its rather combative stance on the current EU-UK Brexit deal and its open remarks on the rising probability of a no deal Brexit," says Petr Krpata, currency strategist at Dutch bank ING talking to the BBC.
Economic data is also key for the pound and we have a number of large releases due for the rest of the week. Consumer Data is due overnight tonight, Housing data on Wednesday with PMI and an update from the Bank of England (BoE) on Thursday. The BoE update has the potential to impact currency market values if any large change in central policies is released.
Martin Beck, lead UK economist at the consultancy Oxford Economics commented recently, “a new prime minister, a likely shift in fiscal policy and continued Brexit uncertainty gives the MPC good cause to continue a wait-and-see approach.”
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