The pound’s value continues to fall as a no deal Brexit looms
While Phillip Lee’s move to the Lib Dems helped provide some respite, Sterling is on the ropes and it could still get a lot lower, writes James Moore
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Whenever I look at the pound’s performance on the currency markets, I’m put in mind of a phrase that will be familiar to fans of dance music and/or hip hop. It is: Bass, how low can you go?
If you know the one I mean, you’re probably now going to find that sample, which has become sterling’s soundtrack of late, very hard to get out of your head.
If you’re prepared to forgive me for that vexatious ear worm, and would like an answer to the question, it all very much depends on just how base the current government is prepared to be.
Which means, in other words, that the pound in our pockets could have a long way to fall.
Sterling’s value has basically become yoked to the Britain’s dire political situation.
A currency is, in many ways, a barometer for the international markets’ view of a country’s economy. Only within the halls of Brexit’s most fevered zealots is no deal seen as anything other than a disaster for Britain’s.
With that remaining an all too real possibility, it falls whenever the threat level is raised. It is Boris Johnson taking it to Defcon One that has resulted in the currency’s current weakness.
The possibility of a General Election delivering a hard Brexit government has only served to exacerbate the markets’ fears.
By contrast, any polling showing Remain parties doing well, could be expected to strengthen sterling. Needless to say, it immediately jumped in response to Philip Lee’s decision to cross the floor of the House of Commons and join the Liberal Democrats. One of his reasons was the damage the Johnson government is inflicting upon Britain’s government.
The all time low against the dollar, the most widely quoted reference point because of its status as a reserve currency, was reached way back in 1985 when the pound closed at just over $1.05.
At the time of writing, it was just above $1.20, still quite a bit above that level.
Now, we know no deal will be bad. But how bad remains open to debate. Some think there are things which could be done to mitigate it, the fabled “side deals” which the EU has shown scant appetite for. Perhaps lorries being stuck in queues at Dover and Calais leading to shortages of fresh food, medicines, etc, will force the UK government to see some sense.
These are the sort of calculations that are informing the stance of currency traders.
There are still hopes that the worst can be avoided. The converse is that if it can’t, the pound could yet fall a lot further. If it happens, it is entirely conceivable that it could reach parity with the dollar, or even fall below it.
The economic consequences of its current instability are malign. Even if sterling’s weakness makes exports cheaper, it raises manufacturers’ input costs so the benefit is limited. And the uncertainty over the UK’s position will, anyway, serve to put buyers off entering into contracts to buy British goods – however cheap they get.
The weak pound, meanwhile, doesn’t do much to help services, the UK’s dominant sector, and willingness of businesses to invest remains in the deep freeze. A currency behaving like a squash ball exacerbates that problem too.
What all participants in UK plc really want is less a weak currency than a stable one so they know where they are. But they’re not likely to get that for a long time.
That bass? It’s cranking up.
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