Monday, 27 March 2017

Monday, 27 March 2017

Brexit starts this week...sterling in for more volatility

Those of you that have been following the currency markets will be well aware of the affect that last year’s EU referendum has had on the value of the pound. On the eve of the vote, sterling was trading at 1.30 against the euro and 1.50 against the dollar, but now sits around 12% lower against the single currency and is over 20% down on the US dollar.

The prospect of a hard Brexit has been weighing heavily on the pound. In the build-up to the election, Brexiteers had been proposing a Norway-style trade deal with the EU, in which the UK retained access to the single market in return for a fee. However, over the last few months it has become clear that the UK government would not be pursuing this option, favouring immigration controls over access to the single market, and the pound has weakened significantly as a result.

The financial services sector relies heavily on this access and the financial markets don’t like the prospect of a hard Brexit. This sector accounts for around 15% of UK GDP and giving up tariff-free access to this market is likely to have a hugely detrimental effect on UK economic output.

EU sceptics are often quick to highlight the economic fragility of the currency bloc, citing Greek debt issues and Spanish unemployment. However, the reality is somewhat different. Inflation in the bloc is now rising, unemployment is falling, and the ecostats are now starting to paint a much rosier picture. In fact, the Spanish economy is actually growing at a faster pace than the UK economy.

It’s surely only a matter of time before the European Central Bank begin a normalisation of monetary policy, raising interest rates as inflation continues to rise. The Bank’s aggressive quantitative easing programme finally seems to be working and I wouldn’t be surprised to see further euro strength once it becomes clear that Marine le Pen stands no chance of winning the French elections.

Article courtesy of Foremost Currency

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