Sterling hamstrung by political infighting

Sterling hamstrung by political infighting

Joshua Roberts FX August 2018

The pound continued its nine-day slide today, breaking through $1.29 to hit its lowest level in nearly a year. While much of the ‘sterling weakness’ we have seen in the GBPUSD exchange rate over the last few days has in fact been due to dollar strength, a look at the EURGBP cross showed that yesterday’s movement was the real thing: the single currency rose above 90p for the first time since last September.

As is now standard for UK-related financial markets, the main drivers have been political rather than economic. A month on from Theresa May’s restoration of Cabinet collective responsibility for her Brexit negotiating position (meaning that dissenting ministers must pledge their support or resign), it is clear that the chances of her securing the votes of the wider party are remote to say the least.

It is difficult to see how any prime minister could survive being defeated by her own party on such a key issue, and in normal times the threat of a Labour government would be sufficient to frighten most Tory backbenchers into submission. Times are far from normal, however, with Her Majesty’s Opposition currently consumed by an argument over what does and does not constitute antisemitism – one that most voters would tend to consider settled and perhaps not the best use of their elected representatives’ time. As a result, there is currently no parliamentary majority for any of the potential Brexit outcomes, meaning that we are edging ever closer to a ‘no deal’ scenario.

Needless to say, a world in which the UK faces severe restrictions in selling its goods and services abroad is not one where many people need to buy GBP, hence sterling’s fall. This sentiment is also reflected in FX option markets, where protection against a weakening pound is more expensive than that against a strengthening one to a degree not seen since March last year.

For businesses that are buyers of GBP – whether UK firms with overseas revenues or those in other jurisdictions looking to hedge sterling costs – this is of course an excellent opportunity to lock in better-than-budget rates. A word of caution to those caught on the wrong side of the move though: do not be tempted by structured products purporting to offer a better-than-market rate. In the FX markets more than anywhere else, there is no such thing as a free lunch. Far from improving a company’s hedging strategy, such products tend to offer a better ‘headline rate’ only at the expense of exposing it to a much greater level of risk.

As ever, the JCRA team is ready and waiting should you wish to discuss any aspects of your FX risk management. Please do not hesitate to get in touch:

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