A mixed year for sterling as uncertainty weighs
01:00, 23 december 2015
· Av CMC Markets
Having had a decent 2014 there was some considerable doubt as to whether the pound would do as well in 2015, particularly given that the uncertainty surrounding the UK General Election was likely to act as a drag, with opinion polls pointing to the supposed inevitability of a “hung parliament”
There was also a widespread expectation that 2015 would bring about the first US rate rise since the turmoil of the credit crisis and in the first quarter of 2015 these factors did weigh on the pound as it hit lows of 1.4565 against the US dollar in the middle of April.
Against the euro the pound has done slightly better, helped in part by the fact that the ECB set about on its first ever large scale asset purchase program.
In fact despite the political uncertainty surrounding May’s election the pound did rise gradually throughout the year against a basket of currencies, though it has slid back in the past month or so, driven on by a combination of an improving economy, low inflation and reduced political uncertainty after the return of a Conservative government in a shock result for the pollsters who had consistently predicted the likelihood of a government with no majority.
As we look ahead to 2016 the fact that the Federal Reserve has finally pulled the trigger on its first interest rate rise in nine years, could well provide the catalyst for the Bank of England to follow suit sometime next year, however recent noises from various MPC officials suggest that could be more towards the end of the year than the beginning.
The decline in oil and broader commodity prices has been somewhat of a mixed blessing for the UK government, delivering a welcome fiscal boost to the economy and UK consumers, who had to endure a sharp fiscal squeeze in the years between 2008 and 2014, but the slide has delivered a significant blow to the manufacturing part of the UK economy, as well as reduced VAT receipts for the UK Treasury.
We’ve seen significant job losses in the oil and gas sector this year and the well documented problems with UK steel and the closure of several plants. The decline in oil prices has also delivered a significant blow to the UK exchequer in the form of lower VAT receipts as a result of lower fuel prices.
Despite this the latest UK GDP projections look set to deliver GDP growth of 2.2% for 2015 and similar growth in 2016 as well, though there are some concerns that turmoil in emerging markets could cause some problems for the UK economy in the short to medium term, and that’s before you look at broader concerns surrounding the possibility of a “Brexit” vote, which might weigh on investment in the short term.
We can expect to hear an awful lot of hot air from both sides of the “Brexit” debate in the next few months regarding the risks of a referendum vote and the possibility of a vote to exit from the EU, which could well weigh further on sterling in the medium term, and this is likely to remain a key worry over the next few months until the vote is out of the way.
While we did see some sterling weakness in the lead-up to this year’s General Election the large scale weakness expected as a result of the poll deadlock failed to transpire, in fact the pound started to rebound in the lead up to polling day.
The same sort of behaviour could well occur in the wake of any Brexit vote uncertainty which means that as far as the pound is concerned the downside could well be fairly limited against the US dollar, though we may see a pullback on a trade weighted basis if we break below the lows of the last six months at 89.85.
It is quite simply alarmist nonsense to state that calamity will befall a potential vote for Brexit, as it is in no-ones interest for a harmful schism to occur between the UK and Europe and the trading relationships between the two blocs. Trade partnerships will go on as before, as will currently existing commercial agreements.
Given Europe’s problems right now and in the future it would be remarkably short-sighted of them if they chose to be difficult with one of their largest trading partners and export markets in the event of a “No” vote.
For the last fifteen years against the US dollar the average rate for the pound against the US dollar has been in the mid 1.50’s with brief strength above the $1.70 level and brief weakness below the $1.40 level.
Overall 2015 has been a mixed year for the pound, up against the euro and Australian dollar but down against the Japanese yen and US dollar.
Expectations of further US rate rises in 2016 could well be tempered by uncertainty surrounding next year’s US Presidential election, which isn’t likely to be that US dollar positive with none of the prospective candidates, Democrat or Republican inspiring much confidence, and the closer we get to polling day the less likely the Fed will be to make any further moves on interest rates.
Some US banks have projected that we could see 3 US rate rises next year, which while not beyond the realms of possibility, remains highly unlikely given that these are the same banks were making similar predictions this time last year, and we’ve only seen since then.
In short the next twelve months are likely to be choppy ones for the pound, with the ongoing speculation of when rates will rise expected to be a key topic.
While we might get one rate rise towards the second half of the year it seems unlikely that we will see any more than that unless we see a pickup in wages and inflation, and with GDP starting to slow in the last few quarters that could well prompt a slight downward bias in the pound in the months ahead.
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