Sterling Bulls Are a Lonely Bunch

Buyers of Sterling are few and far between and that is certainly true for overseas property buyers as the mid-April highs of $1.45 and €1.16 fell away dramatically to the lowest rate since January. Could this be the start of a torrid few months? Is it possible that the pound could fall further?

The pound weakened by over seven cents against the US dollar and over 2.5 cents against the euro in April. As if this wasn’t bad enough news, the signs are that it could be the start of another summertime slide for the pound. You may remember that the last two years the pound also fell by more than 5% between spring and summer due to political and Brexit problems.

So what is the risk that the pound could fall significantly? There are three “downside risks”, as they say in the currency markets. These are interest rates, politics and the economy. We will get an answer to the first of these next week, when the Bank of England’s Monetary Policy Committee (MPC) meets to agree an interest rate increase, or not.

Interest rates

A rise in interest rates will generally strengthen the pound, as money pours in in search of higher returns. The prospect of a rate increase after the next MPC meeting on 10th May was believed to be practically nailed on in mid-April. That was until the release of the disappointing economic data. The British economy grew by just 0.1% in the first quarter of 2018. This was the weakest period of activity in more than five years. Bear in mind that the Bank of England has never raised interest rates when the latest estimate of GDP growth has been below 0.4%.

The Bank of England has never raised interest rates when the latest estimate of GDP growth has been below 0.4%.

The rumour has already hit the pound, but the actuality could be much worse. On 10th May we will learn not only whether there will be an immediate rise in rate, but also whether they are more or less likely to rise throughout the year. If not, we could see a rush of investors out of the UK and a falling pound.

The economy

Britain’s economy slowed to a virtual standstill in the first three months of the year. But is that a permanent malaise or a blip? Since the Brexit vote the debate over the UK’s potential future success has basically revolved around, “Hey, we’re still doing fine!” versus those saying “Brexit hasn’t happened yet, just wait!” Could this summer make it clearer if the UK economy will weather Brexit or take a soaking?

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.