The pound's post-Brexit pain isn't over yet
Reuters/David Gray
Sterling has notched two consecutive days of gains this week, following a massive drop which saw it fall to its lowest level in 31 years on Monday, leading to some commentators to suggest that it may have found a bottom after falling around 12% across two days of trading.
Here is the chart of sterling's performance in the last couple of days:
Investing.com
However, according to analysis from Pantheon Macroeconomics, it would be the "height of folly to rule out a further short-term decline" in the pound. Pantheon argues that the worst is not yet over for sterling and things are going to get worse before they get better. The research firm's estimates suggest that sterling could fall to around $1.20 - a level not seen since 1985.
Here is why Pantheon makes that diagnosis:
"The downward pressure on sterling could build over the coming weeks, as inflows of foreign capital dry up and outflows accelerate. The U.K.'s stock of external liabilities exceeds 500% of GDP, greatly outstripping the ratio in other G7 economies, so the potential for capital outflows is enormous. We do not rule out a decline to the low $1.20s.
"Sterling's day-to-day path will depend on the twists and turns in the political arena. It is impossible to know who will lead the next Government and therefore head the U.K.'s exit negotiations with the E.U., but even prominent candidates within the Leave camp have backtracked on their assertion that the U.K. will leave the single market."
Essentially, Pantheon argues that the current uncertainty surrounding the UK's political landscape, as well as how, if, and when Article 50 - the clause in the 2009 Lisbon Treaty that will start the UK's EU exit process - is triggered, means that people are going to start pulling capital out of the UK, further depressing sterling.
Here is the chart:
Pantheon Macroeconomics
Pantheon Macro may be downbeat on the pound's short-term prospects, but it does expect a reasonable recovery to manifest itself by the end of 2016. "By the end of this year, however, we think that sterling likely will have appreciated to around $1.38. Capital outflows should moderate as the political fog lifts and the next Government negotiates to preserve access to the single market, even at the political cost of maintaining free movement of labour," Pantheon chief UK economist Samuel Tombs notes.
If that prediction does come true, sterling would reach a level last seen in February of this year.
- US buys 81 Soviet-era combat aircraft from Russia's ally costing on average less than $20,000 each, report says
- 2 states where home prices are falling because there are too many houses and not enough buyers
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- Markets rebound in early trade amid global rally, buying in ICICI Bank and Reliance
- Women in Leadership
- Rupee declines 5 paise to 83.43 against US dollar in early trade
- Election Commission issues notification for sixth phase of Lok Sabha polls
- 6 Coffee recipes you should try this summer
- JNK India IPO allotment date
- JioCinema New Plans
- Realme Narzo 70 Launched
- Apple Let Loose event
- Elon Musk Apology
- RIL cash flows
- Charlie Munger
- Feedbank IPO allotment
- Tata IPO allotment
- Most generous retirement plans
- Broadcom lays off
- Cibil Score vs Cibil Report
- Birla and Bajaj in top Richest
- Nestle Sept 2023 report
- India Equity Market