Sterling’s collapse overnight has eclipsed somewhat tepid US labour market data.
The net result is that the Sterling NEER has weakened a further 2% since yesterday and is now down about 20% since November 2015.
While trading desks will have a far better grasp of how risk management systems and liquidity contributed to sterling’s drop, recent political decisions and UK data clearly helped set the scene and will leave the currency vulnerable going forward.
Theresa May’s government and EU leaders have in recent weeks successively dismantled the raft of hopeful predictions which had helped Sterling stabilise over the summer.
Moreover, there is growing evidence that a more competitive Sterling has not translated into materially stronger UK industrial output or exports, with the UK’s trade deficit in goods and services widening in recent months
I would reiterate my view, expressed in early July, that the uncertainty associated with the UK’s possible exit from the EU will likely continue to weigh on the UK economy and currency.
This week’s fall in sterling, if anything, has reinforced my view that the Bank of England will maintain a dovish rhetoric but for now refrain from cutting its policy rate to zero or expanding its current QE program.
Moreover I would not expect the BoE to intervene in the FX market to support sterling at this stage. Read more