Sterling (GBP): special focus
Euromoney's latest coverage of the currency.
Savvy investors understand that one of the biggest risk factors in their portfolio is their domestic currency. This is particularly important in the UK wherethe equity market is dominated by foreign companies, the value of whose overseas operations declines when sterling strengthens.
From strong and stable to weak and jittery, the pound bore the brunt of the surprise UK general election result, but despite May’s quick move to form a working coalition government, sterling will likely stay soft, say analysts.
Two particular risk events have tested the industry’s resilience over the last year – the volatility following the UK vote to leave the European Union in June 2016 and the flash crash in sterling in October 2016.
"Those investors who are denominated in sterling and already have international exposure [and therefore benefited from sterling’s decline last year] might now be tempted to switch into sterling hedged international equity exposure to try to lock in those gains."
Tuesday’s announcement that UK prime minister Theresa May is calling for a snap general election caused a surge in the pound, but can sterling keep the ground it has recovered?
On a day many expected would see the pound sink to new depths, the currency instead responded to news that the UK would be leaving the single market by posting its best performance since the referendum – but whether the day marked a turning point or a mere relief rally, nobody can be sure.
New UK prime minister Theresa May is busy shaping her administration at 10 Downing Street, but it is events taking place barely two miles away, at the Bank of England on Threadneedle Street, that are exercising the minds of those trying to predict where the pound goes next.
The announcement of the referendum date of June 23 on UK membership of the European Union (EU) sent an already-weakening pound into a tailspin, which saw it testing multi-decade lows, but traders are divided on whether sterling has bottomed out as Brexit fears jump.
The world’s two major currencies – the US dollar and the euro – are making strong gains against the British pound, which is potentially bad news for UK multinational companies that declare their profits in sterling.
The surprise outright Conservative win in the UK election has boosted the pound against the dollar – meaning that some UK companies’ earnings are worth less.
The UK has entered election mode, with concerns about the country’s political future dominating trading in sterling. Volatility is rising and investors are seeking protection in the options market.
Post-Scottish referendum, UK political risks have not gone away, while the fiscal picture remains dire.
Debate rages whether current accounts drive FX moves in developed markets or whether it’s a case of correlation, rather than causation. RMB-sterling trading gets off to a flying start
Bankers are already seeing demand for direct renminbi-sterling deals, and anticipate a rise in volumes and market makers, since the announcement on Thursday it is now possible to directly trade these two currencies in China’s onshore interbank foreign-exchange market.
The UK pound has steadily appreciated against leading currencies during the past year, as positive economic data have provided a much-needed boost – but Scotland’s looming referendum on independence and escalating fears of a UK housing bubble suggest the rally is reaching its final stages, predict analysts.
Sterling hit its highest level since the 2008 financial crisis against the yen and a two-year high against the dollar, as the Bank of England (BoE) took a first step to normalize monetary policy in the face of a strong housing market – but it might power higher thanks to a seasonal boost.
The move from the Bank of England to join the Federal Reserve in linking its monetary policy stance to the unemployment rate has boosted the pound; it might continue to do so as investors adjust to the new regime.
Rarely have two decisions to leave interest rates on hold had such an impact on the currency market, but the Bank of England (BoE) and the European Central Bank (ECB) managed to put heavy pressure on the pound and the euro after their policy meetings on Thursday.
Sterling continues to defy bearish expectations, powering to a three-month high against the dollar after UK manufacturing data beat expectations.
Special focus: Currency warsMarch 2013