We use cookies on this site to improve your experience and help us provide you with a better website. An explanation of the cookies we use and their purpose can be found within our Cookie Policy. Your continued use of this site means you consent to the use of cookies.
Hide

June 2016

UK political turmoil weakens Pound further

Published: Monday 27 June 2016

‚Äč
  • UK political turmoil weakens Pound further
  • GBPUSD back at 1985 levels
  • BOE sets aside £260 billion 'just in case'
     

The phrase, "No one knows" has become the standard response to most questions over the weekend. That's the nature of unprecedented events; we should be surprised that no one knows. But what a weekend; quite aside from the whitewash that England's rugby team delivered against Australia, the England U20 team winning the world Championship, Wales making it through to the last 8 of the European football Championship,  Adele and Coldplay were immense at Glastonbury and ...oh yes, UK politics is in turmoil.
 
If Facebook is to be believed, no one voted for Brexit and the new democracy involves the phrases, 'best out of three' and, "I didn't mean it, give us another go. Go on." But that isn't how it works and we have to deal with the new reality. The EU commissioners are unimpressed but it appears the more pragmatic views of the heads of state and the business organisations within EU members are somewhat different from that. I think the UK will be fine once this nonsense is out of the way.
 
The markets did as you would expect them to do and sold the Pound initially but Sterling bounced back by the close of Friday. Nonetheless, the political grief afflicting the UK political parties and the waves being made by the SNP are damaging Sterling and we are back to levels not seen since 2013 in most currency pairs. The flight to safety has pushed the GBPUSD rate back to 1985 levels. That's a tad below the support level that has kept the Pound up over the last 30 years. Whether it has further to fall is unknowable but there is scope for it.
 
That said, this was only the initial reaction. Moody's downgrade of the outlook for the UK is to be expected and I suspect S&P will follow suit. George Osborne's reassuring statement this morning doesn't seem to have done the trick and the BOE may have to draw upon some of the £260 billion it has set aside to steady nerves. Logically, in this kind of an uncertain market, a rate cut would make sense but that would further undermine the Pound at the moment. There are rocks and hard places aplenty for the BOE and the Treasury. 
 
There is data due this week but the UK and its decision to leave the EU and all the melee of repercussions that flow from that are swamping anything the data diary can muster.
 
This is just the start of a prolonged period of uncertainty and we need to be braced for that. Today may not be the beginning of the end but it may be the end of the beginning.
 

Talented Octopus

 
An old timer walked into the bar of a coastal pub carrying a wet sack that dripped water all over the floor of the bar. The publican asked:
 
"What's in the sack?" said the Scottish landlord.
 
"It's me pet octopus."
 
"Give us a look."
 
The old timer reached down into the sack, pulled out the octopus and plonked him on the bar; tentacles waving everywhere.
 
"Very interesting," said the publican, "but I'm not sure I want one of those things in my bar."
 
"It's okay," said the old timer. "He's tame and he speaks English and not only that but he can play any musical instrument at all. Look at this."
 
He gave the octopus a flute. The Octopus thanked him politely played a little tune. He took it away and gave him a violin. Once again the octopus thanked him and played another little ditty.  After several other instruments had been demonstrated the publican said:
 
"Any musical instrument at all?"
 
"Yup," said the old fellow.
 
"Is that right." Said the Publican. "I'll bet you £50 I can find an instrument he can't play. Stay here a minute."
 
He disappeared into the back of the bar and came back with a set of bagpipes. "I bet he can't play these."
 
"Course he can. Just give it to him."
 
The publican gave the bagpipes to the octopus. The octopus thanked him before crawling round one side. Then he came back and crawled round the other side. Then he crawled over the top. Then he dived underneath.
 
"Why isn't he playing them?" asked the publican.
 
The old chap leaned down to the Octopus and said, "what are you doing, you are making me look bad."
 
The octopus stopped what he was doing and looked up at the man. "You think you are embarrassed now. You might want to look the other way once I work out how to get her pyjamas off."
 
 

Today's Major Economic Releases 

 
Market BST Data/Event Previous Expected
EUR 09:00 M3 Money supply y/y 4.6% 4.8%
USD 13:30 US: Goods trade balance -57.5B -59.5B
USD 14:45 US: Flash services PMI 51.3 52.0
EUR 18:30 ECB President Draghi speaks    

FX Research by David Johnson

Daily Currency Analysis with Charlie Horsley 

Back to the Top