Why the Strength of the Pound Doesn’t Matter Like it Used To

The slump in the value of the pound against the euro and the dollar which took place following the Brexit referendum is open to different interpretations. For the hardest Brexiter it is merely a correction to the strength of the pound which was long overdue, will boost the profitability of UK firms exporting to the continent and will encourage more foreign visitors to come to the UK.

Remainers, on the other hand, point to the impact on imports – forcing prices higher and fuelling wider inflation – and the fact that it could help to trigger a flight of capital as the pound is seen as less of a ‘safe haven’. What isn’t up for debate, however, is the fact that, from the point of view of the rest of the world and for as long as Brexit uncertainty remains ongoing, the pound is going to remain a fairly small player upon the global stage. For proof of this, look no further than the fact that currency speculation in the markets is, at the moment, centred upon the dollar vs the euro, and the question of which is going to be effected the most dramatically by the monetary policy the respective central banks are about to unveil.

ECB

When the European Central Bank (ECB) meets this week it will be in order to discuss – amongst other things – the European quantitative easing (QE) programme. President of the ECB, Mario Draghi, has reportedly been holding back on any moves to raise interest rates until the Bank stops buying bonds in order to keep the economy ticking over. Until now, the worry has presumably been that the European economy as a whole was still too fragile to deal with any tapering off of QE. The fact that the winding down of QE may well be on the agenda at the next meeting has prompted hopes that this could lead to a rise in interest rates which will provide a powerful boost to the euro.

Over in the US, at the same time, a mirror image of this situation is taking place. The market has stayed remarkably high despite economic data which has been somewhat variable, and this strength has been underpinned by an expectation that the Federal Reserve is planning to raise interest rates in December. There are still some caveats attached to this presumption, mainly revolving around the trade balance and GDP figures for the third quarter of the year, but the expectation driving the markets higher is that a more ‘hawkish’ approach from the Federal Reserve will see rates rising as a prelude to an easing of the regulations which banks have been operating under since 2007/8.

The irony of the situation is that the expectation of a tapering off of QE in Europe has become so strong that, were it not to emerge, the euro may drop as a rise in interest rates recedes further into the future. With most of the US markets having already priced in any potential rise in interest rates, the pressure is probably resting on the ECB to a greater degree than the Federal Reserve. No matter what happens, it’s easy to see how the Brexit process, and the impact it has had and is continuing to have on the strength of the pound, is regarded by the wider world and its currency markets as little more than a sideshow.

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