Once again the pound has become unfashionable – and the PM’s speech didn’t help

Financial markets seem to react to each tiny bit of information that comes along – no wonder they get a bad name, writes Hamish McRae

Ahead of the Johnson gaffe, a number of US banks put out notes to investors saying they expected the pound to decline (Getty)

Boris Johnson loses his notes when talking to the CBI and the pound plunges. Joe Biden reappoints the head of the Federal Reserve and the dollar soars. Neither in the broader scheme of things was a big deal, but such is the nature of financial markets that they seem to have to react to each tiny bit of information that comes along. No wonder the markets get a bad name. So what is happening?

Several things. For a start, the very nature of a market – any market – is that it has to be open. If it isn’t, you cannot buy anything. The global foreign exchanges are open 24/7, and if you turn up at an airport needing to buy euros or dollars in the middle of the night – and it is always the middle of the night somewhere in the world – you can get them. There is a price, albeit in airports a rip-off one, which is why most of us change our money somewhere else.

In all markets there has to be someone else on the other side of the transaction. You can’t sell a house if there is no one to buy it. In extreme situations, houses get sold for a pound, or in Europe a euro. We reported on the popular Italian scheme where you can buy a home in reach of ski resorts for just that. The market was in effect frozen – and the only way of getting it open was to offer a ridiculous price.

The foreign exchanges are the reverse of the Abruzzo housing market. They are probably the most liquid in the world, and there is always someone prepared to be on the other side of the transaction. The volume is huge, the spreads tiny, and the rate moves every split second. There will be only a couple of thousandths of a cent between buyer and seller on the sterling/dollar rate. Any bit of information of any sort is liable to affect the willingness of someone to be on the other side – to buy when people are selling.

Ahead of the Johnson gaffe, a number of US banks had put out notes to investors saying they expected the pound to decline. For example, Goldman Sachs Asset Management has been bearish on the pound for several weeks. On the other hand, State Street Bank thought the pound would rise, so the bearish view was not universal. What our prime minister managed to do was to tilt the balance just a little towards the sellers, pushing (so to speak) at an open door. He reinforced the widespread view that this is not a competent administration.

There will be many in the US who feel that Joe Biden is not running a competent administration either, for his approval rating hit a new low last week. But by reappointing Jerome Powell at the Fed, he took away one element of uncertainty, and the dollar duly rose. That climb of the dollar partly accounts for the fall of sterling. Against the euro, the pound is much stronger, actually near its five-year high at €1.19.

And the weakness of the euro? That is to do partly with the mixed messages the European Central Bank has been putting out on interest rate policy, partly the surge in inflation in Germany – which the Bundesbank forecasts will go to 6 per cent – and partly because the new wave of Covid cases and the lockdowns.

Confused? Look, in the real world of jobs, business investment, keeping the supermarket shelves full and the vaccine production going, the daily twists and turns of exchange rates don’t matter that much. Companies are run by grown-ups and they know they have to live with currencies that move about, and with governments that will sometimes do stupid things. They get on with it as best they can.

From a British perspective, businesses at all levels are worried about this government – not so much its objectives but its competence.

It will take several months before the prime minister can rebuild confidence in its performance. But it looks like a difficult winter for the US and Europe. The one group of Britons who do seem to be confident about the future are consumers, for retail sales remain strong. We are, of course, all consumers, so that is us. The wisdom of crowds beats the stupidity of politicians.