Pound hit by politics again
The British pound dropped by as much as 1 per cent to $1.3060, before recovering a little early this week. The FT's markets team explains the outlook for sterling as Brexit negotiations and domestic political turmoil continue to put pressure on it.
Produced by Alessia Giustiniano. Filmed by Bianca Wakeman.
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The pound has had another wobbly Monday, with sterling down to a five day low against the dollar by about 1%. So is this another typical fall, or is there something specific that's driving it low? With me to discuss this is Michael Mackenzie, the FT's markets editor. Mike, what do you think? Is the pound having one of those days that investors have been so used to, particularly since the general election in June?
I think it is the market. And again, what's interesting, though, about today is that we have gone below that 100-day moving average. We did that recently, but we bounced back. So I think what the market wants to see here, is this just political turmoil, white sort of where's the sort of smoke versus the fire? And then from that point, say OK, does sterling stay where it is roughly?
Because I mean-- I mean every day seems to be like investors are searching for positive news about Brexit. But it seems like that's going to keep taking time for it to come through, isn't it?
It is. I mean we're in a tough period. We're sort of still waiting to see how the Brexit negotiations unfold. They seem to be stalled at the moment. There were expectations that earlier in the year, back in September when sterling was rising towards 1.36 against the dollar, which was it's high for the year, that you were going to have some kind of deal at least forming by the end of this year. Those hopes, I think, have pretty much back on the back burner. So the market is now back towards this one 1.30 level.
Yeah, and obviously, one of the other drivers that was pushing sterling higher was the Bank of England rate expectations, they finally delivered it. But we're now seeing those expectations come off rather those expectations being downplayed, because of this fairly dovish Bank of England line. How much do we need to also see how data is going to influence sterling's moves?
Well, the data, as always, is critical. So we've got inflation data coming. We've also got inflation-- retail sales as well. The bank, I think, is in a tough position. They did talk tough back in September. That's what helped also drive sterling's rebound against the dollar and against the euro. But I think the market is looking at the Bank of England saying, OK, you've got the base rate back to half a percent, but let's look what the gilts market is saying. And the gilt 2-year, which is the policy sensitive area of the bond market, that yield is actually below the base rate. So you have an inverted curve. And that's a pretty nasty sign that's been sent from the bond market.
To and fro, to and fro with sterling, up and down. It feels like actually everything that the Bank of England is trying to work out is also Brexit dependent.
We could be here for quite a while. I mean, even if we get through this kind of-- or even if we get kind of a dangerous no deal territory with Brexit, we could still be here for a long time.
I think we will be, and I think you've sort of seen it play out this year. When the market thinks that, look, there could be a deal coming, and the Bank of England saying that the economy is stronger than we thought. Therefore we may have to raise rates. Sterling gets back up towards that 1.36 level. When the market's thinking the other way and going hang on, maybe there is going to be no Brexit deal. It's going to be another year of just going through this. Weird get back towards 1.30. Now, as long as the currency stays within that range, we're fine. I think the danger, though, is if you start to break through 1.30 and the political noise coming out of Westminster becomes even worse than what we're currently hearing, and there is a leadership spill, for example, coming then the pound is the barometer of this. The pound is what the markets will look to sell first.
And within that, what you said right at the beginning, the 100-day moving average, those long term trends. Those are the technical breaks that really could determine what--
And that's telling you that the selling pressure is building.
That basically, the old [INAUDIBLE] markets, you know, more buyers than sellers, more sellers than buyers. Why are prices going down? Why are they going up? It does hold true at a certain point. And again, if we stay below that 100-day moving average, you know, the clock is ticking as we approach 1.30.
Thank you very much, Mike.