Sterling’s decline continued yesterday – 24th February 2016

Sterling’s decline continued yesterday since the announcement of the EU referendum with the question now facing everyone with a requirement to buy or sell currency, how far could Sterling fall?

A Bloomberg survey reported that 29 out of 34 economists predict a Brexit to be “devastating for Sterling” and that the GBP/ USD exchange rate will “sink to £/$ 1.35 or below within a week of a vote to leave”. That would be the lowest levels since 1985. But hang on a minute, the current GBP/ USD exchange rate is £/$ 1.3980 so to get to £/$ 1.3500 is less than a 5 cent drop.

Bloomberg’s supposedly “devastating” sell-off represents a further loss of just five cents and Sterling has dropped by that much since 16th February on the mere threat of Brexit. It could therefore get even worse (or more expensive for US Dollar buyers). Against the Euro, it is a similar story. On the 3rd February GBP/ EUR was trading at £/€ 1.3285 and is now at £/€ 1.2710 – a drop of 5.75 cents (over 4.3%) in three weeks.

In 2008-09 during the financial crisis the pound fell from £/$1.99 to £/$1.40. In Autumn 1992, when Britain left the Exchange Rate Mechanism it fell from $1.99 to $1.40. And now here we are again at $1.40. There are two possibilities: Sterling is doomed, heading for abysmal lows against the US Dollar, or it will rebound from the levels that have supported it five times in the last 25 years.

Also yesterday, the Bank of England Governor told parliament’s Treasury Committee yesterday that “if we were in a position where the economy needed additional stimulus…we could cut interest rates towards zero”. He did, however, say he had “no intention and no interest” in setting a negative Bank Rate. Even without the chance of negative rates the possibility of further rate cuts and asset purchases was not exactly positive for Sterling, as evidenced by its third day in possession of the wooden spoon. Sterling lost one Euro cent, one and a half US cents and two and a half Japanese Yen leaving it down by an average 0.9% against the other dozen most actively-traded currencies. On the plus side, it just about held steady against the NZ dollar.

The Canadian and Australian Dollars fared better than the Kiwi but not by much: both picked up three quarters of a cent, equivalent to 0.4%. Their under performance was in line with a broadly risk-off mood among investors which took oil and equity prices lower.

So, how is Sterling going to react today? Will it be the start of a rebound or will the decline continue? Data wise, UK mortgage approvals and the CBI’s Distributive Trades survey are not normally of much importance to Sterling however, after three days of aggressive selling investors might be inclined to support Sterling if the numbers are steady.

Finally, bookmakers are all quoting odds-on prices for Britain to stay in the EU and the latest opinion poll also points to a vote to stay. It is very tempting therefore to look for a Sterling rebound.