Highs- November 2007

In the early 2000’s the UK was still riding the wave of cool Britannia. The UK’s financial sector was booming along with the UK’s economy. With growing optimism and lower inflation, the pound rose from $1.40 in 2002 to $2.11 against the USD in November 2007.    US was invaded by British tourists who took full advantage of the exchange rate to buy countless products. In fact, I can even remember a famous American standup comedian making a joke that when he visited the UK he went to exchange $100 at Heathrow and he got back a loaf of bread.  It really was a time when UK was flourishing, but like the famous saying used by almost all analysts it was a case of “boom, boom, bust”. And the “bust” happened when the financial crisis started in 2008 which saw both the UK economy and the pound collapse.

The Future?

There is one thing for sure. The UK will be leaving the EU.  What deal will be made or if indeed if a deal will be made no one knows.  And as many will speculate on how the sterling will react both during negotiations and once it is all finished, no one can really know for sure as we are in totally unknown territory.

But instead of market talk universally signaling doom and gloom for the world’s oldest currency like there was on the back of the Brexit vote, there is now a split in opinions on where the GBP is heading in the next 12 months.

Firstly, if we look at the views of the bears who some believe that parity with the USD and EUR could still happen for the first time ever.  The feeling is, that with the number of elections in Europe this year with particular focus on the French elections the EU would be forced to take a tough stance in negotiations with the UK causing a hard Brexit.  The belief here is that since the Brexit vote, the sterling has become what is known as a political currency prone more to objections by investors to government policies. 

There is also concern that the UK Government negotiating strategy with the EU is extremely risky, with the Prime Ministers reported willingness to give up membership to the customs union.  An exit from the customs union could disrupt investment into the UK major export sectors.

The other danger is that if negotiations between London and Brussel are indeed as rocky as expected, this could cause a number of high profile companies who have major operations in the UK to activate their contingency plans and leave which would make London’s commercial real estate very vulnerable.

There is also the fact of dollar strength if the FED is aggressive with their interest rate hikes this year and that the euro will gain momentum after the French elections which many believe will see the very controversial candidate Marine Le Pen losing overall after the 2nd round of elections in May.

In the bull corner though there are opinions that we could see the sterling end the year higher with even the $1.30 level against the USD being reached.  The driving factors behind this is that the worst of the Brexit fears are now priced into the market.  There could be a point here as when it was announced that Article 50 will be triggered on 29th March, the sterling reaction was muted at best.  It is almost like that the currency market has already come to terms with the UK leaving the European Union.

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