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May Day rally no turning point for pound, say experts

Investors told not to expect sterling to continue rising after its biggest jump since 2008 following the prime minister's Brexit speech.

May Day rally no turning point for pound, say experts

Most financial experts remain gloomy about prospects for the pound, despite this week's spike in sterling following Theresa May’s Brexit speech.

The pound shot up more than 2.6% on Tuesday to $1.23 against the dollar, its biggest jump since the financial crisis.

It has continued to rally against the dollar and other currencies as traders digest the prime minister's two messages: on the one hand stating her readiness to accept a 'hard' exit from the European Union if talks to retain some access to the single market fail; on the other, stressing Britain would remain a ‘best friend’ to the EU.

The currency's positive response lifted the pound off the near 32-year lows it plumbed after the shock EU referendum result last June. Although sterling was arguably due a boost after its post-ballot battering, the move nevertheless puzzled David Jane of Miton Asset Management.

'In the short term moves are being driven by sentiment around Brexit. How this might pan out can be argued both ways at present. On the positive side the market may now be discounting a full, hard Brexit given recent events.

'Conversely, the uncertainty that is inevitable from the no doubt difficult and protracted negotiations might be argued to add further weight on sterling. Take your pick,' Jane said.

Other investors doubt the pound has turned a corner, which if you are an investor who doesn't go on foreign holidays is probably a good thing. The weakness in sterling has been a prime factor in the UK stock market's recent record two-week run of all-time highs, which have extended the referendum rally. 

This is because a fall in the pound boosts the value of overseas profits earned by many of the big multi-nationals in the FTSE 100.

David Shairp, head of research at Prudential, the investment and pension group, said this week's rally was not a sign of a longer-term rally in sterling. He said it reflected investors ‘taking profit in underweight sterling positions’ and was a ‘short term move rather than a massive turning point’.

Although May’s speech was important, he believed an earlier speech by Bank of England governor Mark Carney helped to steady the pound and provided a ‘balanced assessment’ of Brexit options.

Carney hinted a more hawkish stance was possible with interest rates rises under consideration if inflation became a problem due to the low pound making imports into the UK more expensive. ‘It let the market see it was not all one way,’ said Shairp.

Alex Scott, deputy chief investment officer at Seven Investment Management, was also sceptical about whether the bounce in sterling marked the end of a difficult period for the currency.

‘There are still risks to both sides,’ he said. ‘We are in an environment where there is a great deal of uncertainty but we do have a little more clarity about the government’s objectives and process [regarding Brexit].

‘Markets in particular seemed to be responding to the announcement that there will be a parliamentary vote at the end of the two-year [Brexit] negotiation phase and that opens up a range of possibilities.’

Scott added that the direction of sterling would depend on the ‘progress of the economy over the next six to 12 months and whether concerns about the impact of Brexit coming home to roost start to undermine the economy’.

Joshua Mahoney, market analyst at trading platform IG, agreed the rally in sterling was ‘counterintuitive’, sparked ‘by the one thing everyone has been dreading: a hard Brexit’.

However, he believed May’s tough approach to EU negotiations was good for the pound and that the rally could signal a more durable revival.

‘[It] could very well mark the beginning of the end for sterling weakness, for May’s bold approach has put everything out in the open, thus reducing the likeliness of further sterling sell-offs each time anything remotely resembling a hard Brexit is brought up,’ he said.

‘With everything out in the open there is a good chance we will see the pound start to recover from here on out.’

The downside of a strengthening pound would be the impact on the FTSE 100, which has greatly enjoyed the boost to its big dollar earners. This could mean ‘the FTSE may be on the cusp of a significant downturn,’ said Mahoney.

Scott agreed the performance of the FTSE over the past year was ‘built on fairly fragile foundations of a weak pound’ and this ‘money illusion’ made investing in the index less attractive.

‘The FTSE is not looking nearly so attractive in dollar or euro terms,’ he said. ‘I think that remains the case…a strong rally [in the pound] will blunt the FTSE.’

Ken Odeluga, market analyst at City Index, said the FTSE 100’s recent winning streak could be at an end but thought a period of sideways trading was more likely than a major downturn.

‘With such tailwinds as the continuing oil price rebound, resilient consumption, and even the moderation of strong-dollar concerns as the "Trump trade" fades, the FTSE is more in line for a pause than a new downtrend,’ he said.

12 comments so far. Why not have your say?

Andrew Stevenson

Jan 19, 2017 at 12:09

I'm old enough to remember when 100 'expert' economists signed and had open letter (in all the major newspapers) saying that they believed the policies of the government, (PM Margaret Thatcher, chancellor Geoffrey Howe) were going to destroy the economy. They did this with spectacular miss timing. Virtually from that day the economy set off on one of biggest recoveries in the UK's history. One of the signatories was a subsequent Governor of the Bank of England (Mervin King). I don't subsequently remember a single one of those 'experts' ever giving any sort of apology. I'm sure Mark Carney, whom I regard as being particularly arrogant, would regard himself as an 'expert', but I am amazed that seemingly intelligent people can't form any connection between Mark Carney announcing the day after the referendum result that he was going to cut interest rates (by 50%), and threatening to put them down to zero, and announcing that he was going to pumping billions more into the financial system - and the pound falling in value.

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Jo Public

Jan 19, 2017 at 12:22

In other words the pound may go down again. Or it may not. But in any case it is going to go up and down like a yo-yo in the meantime. Investors may be happy, but it is getting damned hard to do business here.

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Jan 19, 2017 at 14:28

well done Jo

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Alan Tonks

Jan 19, 2017 at 14:42

What experts?

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Jan 19, 2017 at 15:17

Look Ahead brexit+ pound+ sterling massive gains .everone will want a ten pound note in their pocket .

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Jan 19, 2017 at 15:35

Pre 1999 in the car boot sales .illegal immigrants .pockets stuffed with german marks .was not difficult to see their starting point.

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Jan 19, 2017 at 16:10

Pre 1999 car boot sale .illegal immigrants .seller next to me .sold em. two striped business suits .came back ten minuets later .exchanged more marks for pounds .no one would take marks .got ripped off with the currency exchange .asked for the stripes back..when they was let out of the van someone should have told em they have arrived in Briton .

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Roger Savage

Jan 19, 2017 at 16:31

Quoted "experts" often have no real idea, they make it up as they go along. Or, they're part of a coordinated attempt to manipulate markets.

Excluding manipulation for one minute though...

When the "experts" get it wrong, nobody (i.e. financial press) calls them out the next time they make a prediction (despite the internet making traceability of prediction outcomes easier than ever).

Look at how many broker ratings (including target prices) for shares turn out to be wildly wrong. Yet, bizarrely, the same brokers then make more predictions that are published as if they have any credence whatsoever.

A good rule of thumb is to do the opposite of what the investment bankers with the initials GS advise...

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Mike R

Jan 21, 2017 at 10:32

You should understand that Broker/ Analyst forecasts are there only to meet a trading agenda and in todays computer driven markets are meaningless. The market is driven by an individuals computer driven Algorithms. It can now do what the computer operator wants it to do. And the news to drive it can be equally contrived. Plus Borrowed money .

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Ian Holmes

Jan 21, 2017 at 10:55

For anyone who is not familiar with Æsop’s fable of the boy who cried “Wolf!” It is available from Amazon at £5.99. Maybe we're seeing a modern day version unfolding before our very eyes.........

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Jo Public

Jan 21, 2017 at 11:37

For anyone not familiar with the Emperor Nero, he is the one that distracted himself on the fiddle while his Capital burned ... etc.

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David B

Jan 21, 2017 at 14:18

The "experts" forecast a 30% drop in the FTSE on the back of a Brexit vote - hmmm.......

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