The Pound has fared better than many had predicted at this late stage in the Brexit drama. Especially when one considers Theresa May could invoke Article 50 as early as next week – assuming the Brexit bill passes through the House of Lords without amendments.
In some ways, her announcement late last year for a March break has given markets the necessary time to adjust to the political shocks that may arise at the negotiation table, and in another way, has removed the unnecessary uncertainty surrounding the vote in June.
Why then, is the Pound in a strong position against the Euro and why, considering the strength of the US economy, is the Pound heading towards monthly highs against the US Dollar?
The bigger picture on the global economy
In hindsight, there are reasons for Sterling strength and despite the political woes surrounding Brexit, the current picture is not as bad as many had painted. Back when the UK voted to leave the European Union, stories of doom and gloom were pasted across all major news outlets with the promise that little Britain will face self-mutilation as a result.
So far so good, yes there are some indicators that point to a slowing in some areas of the economy. The latest Office for National Statistics report highlights net immigration fell 49,000 in the year to September, compared with the previous year. As such concerns have been raised for the job sector despite no signs yet that employment rates are falling.
There’s then the issue of higher inflation, and thus higher consumer prices and the potential for lower consumer spending. The latest Retail Sale figures seem to suggest a drop in spending, but its far too early to draw any sensible conclusions from the little data available.
In similar fashion all signs point to a thriving US economy, leaving the FED to dangle carrots in front of the currency markets and prompting die hard US Dollar bulls to fall off their chairs. It would seem that little is required in getting markets excited about a US rate hike, forgetting the promises made last year by the Federal committee.
I feel a sense of Déjà vu coming on, and given how cautious the Chairlady Janey Yellen is under relatively normal market conditions, imagine the pressure she faces with Donald Trump running loose. It’s not just the US economy that the FED must consider when making monetary decisions, political tensions in Europe could change the face of the Eurozone forever if Le Pen is elected, and China’s growing debt woes only add further spanners in the works.
Markets are well aware of the political and economic risks of a Trump Presidency, and the Pound’s position against the US Dollar may be significantly different if Clinton – the safer political option of the two – emerged the winner of last year’s Presidential elections.
FOMC members must factor in a Trump Presidency and the potential implications on the US economy, but equally factoring in the global risks faced in Europe and China.
Eurozone crisis continues
There have been two common themes following the Brexit debacle, one is that the UK will suffer at the feet of the remaining 27 member states to preserve EU integration, and the other is that a so called ‘hard Brexit’ poses a far worse risk to the economy than a soft Brexit, i.e, the ‘Norway option’.
So why then are investors favouring the Pound over the Euro at present? Fears of an existential crisis within the Eurozone have since emerged as the threat of a Marine Le Pen victory comes to fruition.
Can Marine Le Pen make it three in a row? If the polls are correct, Le Pen will breeze through the first round of the French elections and face a huge defeat in the second round. Does this sound familiar? Similar polls suggested a white wash for both Brexit and Trump.
It’s not just the French elections that have markets worried, a similar situation presents itself in Holland and Italy, and it looks as though the recent anti-establishment, anti-EU rhetoric could be here to stay for the time being.
Make no mistake about the huge implications of the Brexit vote, until we know more it remains difficult to predict how the outcome will play out, but with Theresa May on the verge of beginning the process of an EU-exit, the Pound’s current form could soon become a distant memory.