Advertisement

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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?

Advertisement - Article continues below

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Recommended

The currencies to bet on this year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
Guru watch: buy gold ahead of China's big currency move
Gold

Guru watch: buy gold ahead of China's big currency move

China has steadily been building “a renminbi-based international payments system", says Charles Gave, founding partner and chairman of Gavekal.
27 Jul 2020
Will this weekend take the world a step closer to a federal Europe?
EU Economy

Will this weekend take the world a step closer to a federal Europe?

The EU is meeting to discuss issuing common debt backed by all member states. That’s a big change, says John Stepek, and could have far-reaching effec…
17 Jul 2020

Most Popular

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
The charts that matter: gold finally sets a new record high 
Global Economy

The charts that matter: gold finally sets a new record high 

As gold surges past its previous high, John Stepek looks at how it's affected the charts that matter most to the global economy.
1 Aug 2020