Currency Corner: what will it take for sterling to turn around?

Sterling has had a woeful couple of years. But it's not going anywhere until Brexit is resolved one way or another, says Dominic Frisby.

in-association-with-ofx
Boris Johnson and Jeremy Hunt © Matt Frost/ITV via Getty Images

Boris Johnson is almost certainly going to be Britain's next prime minister

Hello and welcome to this week's Currency Corner.

I thought today I'd come back and take a look at the pound. It's had a woeful couple of months. In fact, it's had a woeful couple of years.

Let's not beat about the bush it's had a woeful dozen years back in 2007, it was $2.11, today it's $1.25.

My narrative remains the same: it's cheap, it's undervalued, but it's not going anywhere until Brexit is resolved.

Whether that's by not leaving, or by leaving with no withdrawal agreement, it almost doesn't matter. The main thing is that Britain escapes this limbo in which it finds itself, and that there is a clearly visible path to a resolution, which at the moment there is not.

Boris Johnson is going to be Britain's next prime minister, as we have long since known. But both contenders in the Conservative Party leadership contest have pledged that come what may, Britain will leave the European Union on 31 October. Theresa May said the same thing about 29 March, but this time one suspects Johnson may stay true to his word.

The big question remains, "how"? This we do not know.

Will the EU agree to renegotiate? It has said it won't. Will Parliament allow no deal? It has said it won't. Will Parliament allow any deal?

Will there be a vote of no confidence and a general election? The Labour Party is in an even worse state than the Tories a general election could be even more damaging to them so unlikely. MPs on both sides of the House, as well as the so-called Independent Group in the middle, whatever it's called now I have no idea will not want an election as so many risk losing their seats.

The only parties who will want a general election are those who stand to gain by it being the Lib Dems and the Brexit Party and they have little influence in Parliament. And even the Brexit Party may not want to take on Johnson just yet.

There are so many ifs and buts and maybes. It's possible, even likely, that things will become clearer once Johnson is prime minister, and some kind of conversation with the EU resumes, but who knows. The one political constant over the last couple of years is the failure to make progress.

But we need some kind of political progress if sterling is to get out of this mire.

This is what a downtrend looks like

Here we see the pound since Britain failed to leave the EU on 29 March. That is what a downtrend looks like.

190712-gbp-usd

We have gone from $1.30 to $1.25.

Zooming out a little to a two-year chart, we can see we are re-testing the lows of late last year, and we are right at the bottom of a range which sits at $1.25 on the downside and somewhere around $1.34 on the upside.

190712-CC02-gbpusd

This could be a nice tradable double-bottom here, but everything will depend on what tricks Johnson has up his sleeve. It's pretty plain to see from the last couple of months that the forex markets are not particularly keen on the no-deal rhetoric.

What's more, we are in a downtrend. So something needs to happen to reverse that.

The value arguments favour a higher pound (on a purchasing power parity basis, somewhere between $1.50 and $1.60 is "fair value"). The cyclical arguments do, too. Technically even with that dontrend we are at a number that would "make sense" as a reversal point.

The barriers are political and economic. First, markets will want to see something that persuades them that economically Brexit can work. Second, they will want to see some evidence that, politically, there is a path out of this quagmire.

A new prime minister in whom the public feels confidence may be just the ticket. There is no sign markets believe that even for a second at present.

But at least it is a start.

Recommended

The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021
The charts that matter: gold and bitcoin both slide
Global Economy

The charts that matter: gold and bitcoin both slide

Gold and its modern counterpart, bitcoin, both sold off this week. Here’s what’s happened to the charts that matter most to the global economy.
11 Sep 2021
El Salvador could be the shape of things to come for bitcoin – and emerging nations
Bitcoin & crypto

El Salvador could be the shape of things to come for bitcoin – and emerging nations

El Salvador has become the first nation to adopt bitcoin as legal tender. That’s an extraordinarily bullish move both for bitcoin and for El Salvador,…
7 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How to stop recurring subscriptions becoming a drain on your money
Personal finance

How to stop recurring subscriptions becoming a drain on your money

Tracking and pruning subscriptions isn’t as easy as it sounds. Here's how to take charge.
14 Sep 2021