Brexit or no Brexit, it has been clear for months that the only way for the pound was down. When a country is running a balance of payments deficit unsurpassed in peacetime history, it is hard to make a compelling case for its currency going up.
In truth, all the referendum vote on 23 June has done is to bring forward the fall in sterling and squeeze it into a shorter period. Following the latest set of poor trade figures, the pound looked as if it might test its post-referendum low against the dollar, but it later recovered to close above the $1.30 level.
The respite is likely to be shortlived. Even though political concerns about the UK have faded since the formation of Theresa May’s government, there are other reasons why the pound will hit $1.20 before it hits $1.40.
First, the Bank of England has made it clear that it is thinking about further easing of policy in the coming months. Threadneedle Street is adopting a policy of benign neglect towards the currency, seeing a cheaper pound as a mechanism for boosting growth through higher exports.
Second, strong jobs growth in the US has put a rise in interest rates back on the agenda for the Federal Reserve. The exchange rates for a pair of currencies are affected by relative moves in interest rates, and investors can see American borrowing costs going up at the same time as UK borrowing costs are coming down.
Is this cause for concern? Well, obviously it is not marvellous news for those planning a holiday in Florida or California this year. But for it to be a sterling crisis investors would have to be dumping UK government gilts in large quantities, and that’s not happening. A weaker pound will help to close the trade gap and gilts are so attractive that the Bank is having trouble getting investors to part with them under its new quantitative easing programme. The best of both worlds, in fact.
