Sterling weakness despite strong economic data

Union Jack with Silhouette of London

This week we have seen continued Sterling weakness, even though economic data has been better than expected. Usually when we see data beat forecasts, it strengthens the currency concerned. That hasn’t been the case this week.

The UK economy is actually performing very well, despite the doom and gloom you hear on the BBC and some other news outlets e.g. despite unemployment falling to it’s lowest levels in more than 40 years, the BBC focuses on wage growth to put a negative spin on it (negativity bias, or in other words, bad news sells!). This week alone we have seen: Unemployment drop to 4%, the lowest since 1975. Inflation sits at around 2.5% which is pretty close to the target level. Retail Sales bounced back growing by 0.7% last month, which was much better than the market had been expecting.

Why then, are we seeing Sterling weakness?

With the economy proving to be robust and resilient to Brexit, why is the Pound so weak? This is all to do with uncertainty. Many such as the Bank of England governor Mark Carney, had warned of a million job losses and a recession due to the vote to leave the EU. We know now that this is not the case. In fact the unemployment rate is the lowest it’s been since 1975, 2 years before I was born! Manufacturing and exports are at good levels, in part due to the weakness of Sterling making UK goods more attractive. But despite the backdrop of a resilient economy, Pound/Euro rates remain close to the lowest they have been in a year, and Pound/Dollar rates are also at 1 year lows of $1.27.

Only part of this is due to Brexit uncertainty and Sterling weakness. The US Dollar has also been gaining in strength due to a flight to safety caused by problems in Turkey, as my colleague Michael mentioned earlier this week. This week has shown that even strong fundamental data is not helping to strengthen the Pound.

Will the Pound go back up?

In the short term, I think that there’s not much hope of the Pound making any gains unless we get any progress with Brexit negotiations. In my view, the EU are putting politics above the best interests of EU citizens. The UK is the 5th largest economy in the world, and the 2nd largest export market for the EU. It is very clearly in their interests to agree a fair deal for trade. If they do, it will likely send GBP/EUR rates back up again as uncertainty dissipates. If however the EU dig their heels in and put ideology before common sense, it will harm both the UK and the EU. In this scenario the Pound could fall by as much as 10%.

Much will depend on whether everyone comes to their senses and make a deal. I don’t expect a recover for the Pound unless this happens.

Avoiding Brexit uncertainty if you have Pounds to exchange

If you need to convert Pounds to another currency, then the current weakness should be a concern. To remove your exposure and protect yourself against the Pound getting any weaker, get in touch today to discuss our currency exchange services. We offer exceptional rates of exchange, and ways to freeze the currency rate for up to 2 years, perfect for budgeting for buying property overseas or to guarantee the cost of importing goods or services.

Click here to make a free enquiry, or email me directly at alastair@currencyforecasts.co.uk

Have a great weekend.

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