As traders caught their breath on Friday morning, following the pound’s dramatic overnight plunge, one strategist came up with a neat way of explaining the market forces at play. HSBC strategist David Bloom said: “The currency is now the de facto official opposition to the government’s policies.”
In other words, ministers at the Conservative party conference hint at a hard Brexit and the pound weakens, reflecting widespread fears the UK economy will suffer long-term losses and slip down the global rankings.
It is a new world for a currency once happy to bend itself to simple rules: generally, strong economic data boosted the pound, weaker indicators hurt it. Now, as Bloom points out, the pound has become a political and structural currency. As the Brexit drama plays out, sterling is subject to the utterances of divided UK ministers and EU officials, and to worries about Britain’s global standing.
Bloom also has an explanation for the pound’s path since the vote, which saw it take a dive, stabilise and then, in the last week, another lurch lower. “To us, the foreign exchange market is exhibiting an uncanny resemblance to the five stages of grief,” he wrote in a research note.
“First, following the Brexit vote came the denial – theories circulated whether a second referendum would have to take place. Second was anger – claims the vote was unfair. Third was the bargaining – arguments maybe it wouldn’t be that bad, what if the UK followed the Norwegian or Switzerland model. Now, the fourth – a gloom is prevailing over the pound.”
That gloom stems from worries that the government will put a crackdown on immigration above all else in Brexit negotiations. The price it will pay will be to end up shut out of the single market. The upshot is foreign investors find the UK less attractive, home-grown businesses face costly trade barriers, and the lack of access to skilled workers from overseas compounds their problems.
Economists see this as a frightening prospect for an island economy reliant on inward investment. Bank of England governor Mark Carney summed up the risks when he warned in January that Brexit could test “the kindness of strangers” that the UK relies on to fund its hefty current-account deficit.
These worries are best expressed in the pound, which hit fresh 31-year lows against the dollar on Friday. Even after recovering from a short-lived “flash crash” to $1.1841 in Asian markets, it was still down more than 1% at $1.2450 as a torrid week came to a close. On the day of the Brexit vote, 23 June, it was just below $1.50.
Grant Lewis, head of research at Daiwa Capital Markets Europe, noted sterling was the world’s worst performing currency over the last week. “Even over a longer time period, sterling now sits among a sorry band of currencies in terms of performance – since the start of the year only the currencies of Angola, Sierra Leone, Nigeria, Venezuela, Mozambique and Suriname have fallen by more.”
And there is worse to come, he warns. “Sterling’s all-time low against the dollar was $1.05 – if the government keeps careering headlong into a hard Brexit, a return to those lows is not unimaginable.” Bloom sees the pound at $1.10 by the end of 2017.
There are silver linings of course. Tourists have flocked to Britain’s luxury boutiques to buy cheaper watches. For exporters, the weak pound makes their goods more competitive.
But to focus on the boon to overseas sales is to forget that the UK imports more than it exports. And those imports, from foods to metals, have become pricier on the pound’s fall. British factories will pass those higher costs on to consumers, and sterling’s weakness will be felt at the tills.
And so to the fifth phase of grief: acceptance. Currency traders have already reset their expectations for the UK outside the EU. It’s time the public joined them in accepting a vote for Brexit was a vote for a weaker pound – and all that comes with it.