Political uncertainty continues to affect Sterling – 21st March 2016

Political uncertainty continues to affect Sterling

It is widely accepted that uncertainty is bad news for the value of a currency with Sterling again backing up this assumption. The split between the Prime Minister and his Work and Pensions Secretary has given rise to renewed concerns about Britain’s continued presence within the European Union. Sterling opened lower in the Far East this morning, wiping out some of the gains it had made on Thursday and Friday against the other major currencies. It was higher by an average of 0.3% at Friday’s close compared to where it opened because of downward pressure on the commodity currencies.

Last Thursday’s Bank of England policy decision surprised no one, with the 0.5% interest rates celebrating its seventh birthday after a unanimous decision by the Monetary Policy Committee. The guardedly upbeat economic tone of the MPC minutes was however positive for Sterling.

There had evidently been some out there who saw a chance that the MPC might consider lower – even negative – interest rates if the UK economy were to slow. The minutes of last week’s meeting appeared to dismiss that idea, as “the MPC’s best collective judgement is that it is more likely than not that Bank Rate will need to increase over the forecast period”. The committee also observed that uncertainty about the EU referendum “is likely to have been a significant driver of the decline in Sterling”.

The Euro also did reasonably well at the end of last week, helped by a positive 0.2% headline inflation figure. At the front of the pack the US Dollar and the Japanese Yen strengthened by 0.3% – nearly half a US cent – against Sterling. Bringing up the rear the NZ Dollar was down by two cents or -0.9% and the Aussie was in the penultimate spot with a loss of one cent.

In a shortened holiday week, there are no big-deal ecostats. Rightmove opened up with a 7.6% annual increase in house asking prices. This morning’s CBI industrial trends survey will report on UK manufacturers’ order books.

US existing home sales come out after lunch and the EC reports on consumer confidence.