Sterling goes down the elevator – 29th February 2016
Sterling goes down the elevator
A few years ago it was observed that Sterling “goes up the stairs and down the elevator” by the Head of Forex at Barclays, essentially illustrating when investors decide en masse to sell Sterling, they do it quickly and with purpose. It took Sterling six and a half years to climb from its 2001 low to the GBP/USD 2.11 peak in 2007. It managed the fall back to GBP/USD 1.40 in just over 12 months. Between January 2009 and July 2014, GBP/ USD got up to £/$ 1.72 before falling all the way back in less than 24 months.
Its treatment last week was symptomatic of the ease with which investors can sell Sterling when they decide to do so. It was pretty bad again on Friday for Sterling (although it did strengthen by nearly 2% against the South African Rand), with it’s biggest loss the 4.4% it gave up to the Canadian Dollar.
After their meeting in Shanghai at the weekend G20 finance ministers issued a communiqué which noted that “downside risks and vulnerabilities have risen”. One of those risks and vulnerabilities was “the shock of a potential UK exit from the European Union”. There will be another four months of this before Britain votes on 23rd June 2016. There is no assumption that the “leavers” will win the day: opinion poll suggest the “stayers” have a majority of 55-45 but it could go either way. Fortunately for Sterling there were other distractions on Friday; German inflation slowed to zero, taking the wind out of the Euro’s sails, and quarterly growth in the US was upwardly revised from 0.2% to 0.3%, helping the US Dollar to a three-quarter-point rise.
The main piece of data on today’s economic calendar is Eurozone inflation. It will probably have slowed from 0.3% to a provisional 0.1% but whether that will help Sterling against the Euro is a different matter. With the European Central Bank policy meeting in clear sight it is unlikely that today’s inflation number will have any material effect on investors’ expectations of lower euro interest rates and increased asset purchases by the ECB. Even so, they will probably feel obliged to do something if the number is markedly adrift from forecast.
UK mortgage approvals and consumer credit should have no impact on the pound. Nor should US pending home sales make much difference to the US dollar. Tonight the Reserve Bank of Australia is expected to keep its benchmark interest rate steady at 2%.