It's been a brutal week for Sterling. Same for the FTSE. Ditto for the British government. Even for commuters into London - they woke up to some major snow-shovelling on a bone-chilling Wednesday morning; and were pumelled by sheets of ice-cold rain this morning.
For Sterling the lacklustre end to the previous week has been followed by a weaker pound, which finished this week with almost all of its 2018 gains against the Euro wiped out. This has been due to a combination of poor economic data; Brexit risks coming into sharp focus; and a fall-out from the equity markets - which have been on a roller coaster ride of their own all week.
First up on Monday, the FTSE 100 opened nearly 100 points down - in line with other stock markets around the world - on concerns about inflation and the higher interest rates likely to ensue. At 9.30am sharp, an index measuring economic activity in 80% of the UK economy, The UK Services PMI, released data which showed that the index was at a 16-month low. This caused the pound to shed almost 1 cent against the EUR; and 1 and-a-half cents against the US Dollar. This was swiftly followed by a statement from the EU's Chief Brexit Negotiator, Michel Barnier, who said that trade barriers would be "unavoidable" if Britain left the Customs Union. Sterling dropped further on the news. Why the market seemed to be taken by surprise by this statement is rather puzzling because Theresa May has consistently said that Britain would be leaving the Customs Union. But then again, she has also consistently said Britain would be seeking a "deep and special" partnership with the EU. The exact detail of how one can have a "deep and special" relationship with a club they are leaving is yet to be spelled out. Next up was the revelation - from the UK government's own Brexit economic impact assessments - that virtually all regions of the UK would be worse off under Brexit. The regions that clamoured for it the most, as measured by the Brexit referendum statistics, seem likely to be impacted negatively the most. London would be least impacted. In fact, if the assessments are true, the strong correlation between voting for Brexit and taking an economic hit, is a revelation in itself. Exactly what it reveals is debatable at this stage, but will surely be a subject that will keep future historians; scholars as-yet-unborn; and possibly next-generation comedians, very busy for years to come. As has become a familiar pattern with negative news regarding Brexit; Sterling fell further.
The next day, as stock markets around the world continued to face up to their own risks associated with the end of an era of low borrowing costs; share prices were revised downwards; risk appetite moved in the same direction and (yes, you've guessed it) Sterling fell further.
Now, pause for a moment and imagine being the Finance Director of a large UK-based company. You contact your bank or foreign currency provider at 9am on Monday, to obtain a quote on a bill for USD10m project. You go back to your desk to work out some numbers and obtain Board approval. You go back to your currency provider the following day at lunchtime and you're told your forex bill is now over £153k higher! What do you do? Do you go back to the Board to seek approval of the higher cost - and risk the market moving against you even further; or do you cut your losses and trade immediately? That was somebody's real-life conundrum this week.
Fortunately, by Thursday, the global sell-off in stock markets had subsided and calm had been restored. The Bank of England Governor spoke and he indicated that higher UK inflation meant that his Monetary Policy Committee was likely to raise UK interest rates sooner than had been previously indicated. Following the announcement, Sterling jumped almost 1 cent against the Euro and nearly 2-cents against the US Dollar.
But the story doesn't end there. It started with Michel Barnier - so it had to end with Michel Barnier. This afternoon Mr Barnier said that the "transition period was not a given". As with many things Brexit, the market - as if taken by surprise by the announcement - dumped Sterling in very short order. And this, is how Sterling finished the week against all major currencies: much lower than it began.
Hopefully next week's commentary will not be as gloomy; but we're only messengers, calling the FX landscape as we see it.
See you next week!
To discuss how the above may affect you, please contact your Currency Dealer at Heritage Pay on +44 (0) 203 858 7274.