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The Sterling Rollercoaster

  • Financial Analyst
  • Blog post submitted on 18th December 2019
06744 CC Trader Talk V2

Whether its consumers pondering whether to import a vehicle from the UK before Brexit arrives, or investors trying to engage in currency plays, currencies and particularly the sterling has seemingly played an extraordinary part of our lives recently. And what a show it has been putting on.

Traditionally the sterling is quoted against the dollar, also known as the Cable, which has its origins from the time when a communications cable under the Atlantic Ocean synchronized the GBP/USD quote between the London and New York markets. For our purposes, I am referencing it against the Euro; however, the performance of the sterling against the dollar and euro has been highly correlated.

The EUR/GBP or Chunnel as it is sometimes referred to by traders, started this year at £0.90/€, strengthening all the way to £0.85/€ on the hope that then UK Prime Minister Theresa May would deliver Brexit. History would have it otherwise though, and after a series of rejections in the UK parliament over the withdrawal agreement reached with the EU, she ultimately resigned by the end of May. Consequently, this sent the sterling into a downward spiral over the next few months, as confusion reigned supreme over the fate of Brexit, and the fear of economic ramifications should the Kingdom leave in a disorderly fashion. At the height of it, the sterling retreated to £0.93/€ by mid-August as newly elected leader Boris Johnson attempted to work his magic in vain, despite an improved deal, as the prospect of an agreement over the manner with which the UK would divorce from the EU remained elusive.

Johnson’s definitive attitude towards Brexit, determined to proceed with a hard Brexit if necessary, saw the sterling climb steadily again, as a conclusion to the prolonged saga seemed at hand. Despite Johnson being unable to deliver Brexit at the first time of asking, his call for an election, whereby the polls remained handsomely in the conservatives favour, helped fuel the sterling rally further.

The whopping victory by the conservative party propelled the sterling to a level last seen in July 2016, at £0.83/€. The majority of seats in parliament sets the path for Brexit to finally be pushed over the line and political uncertainty to fade back into the background. The steep rally has been cut short though as the newly elected Prime Minister signalled this week that he is willing to pass legislation that would create a “cliff-edge” Brexit if the UK fails to strike a deal with the EU by the end of 2020, bringing the fear of economic disorder back on the table.

As a result, the sterling has depreciated back down to around the £0.85/€ as of this writing. From crest to trough, the Chunnel has taken participants on a rollercoaster ride of an 11 percent swing year-to-date, which is quite significant for a major currency pair.

Where the EUR/GBP goes from here is the million-dollar question from hereon. The ability to play currencies correctly, and in this case the sterling, is to be able to anticipate the permutations of Prime Minister Boris Johnson’s thinking, which is no mean feat for ordinary citizens like ourselves to visualise the pantomime that surrounds the UK Prime Minister’s decisions.

My guess is that he will leverage the threat of a hard Brexit with his EU counterparts more sternly given his party’s parliamentary majority, and ultimately for better or for worse he will deliver it within the proposed time-lines. The sterling and the country will be better for it, as the focus of both the EU and the UK can return to the real issues at hand, mainly being the issue of economic growth and the avoidance of the Japanification of Europe.

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