Negatives building
This morning’s confusing GDP data in the U.K. is a mask for the underlying issues that are going to face sterling in the New Year. I cannot see any good reason to buy the pound right now or going forward unless the plight of other currencies produce a double negative. Even then, whilst I agree with the sentiments of my friend #patrickreid , I find the case for a fall for sterling even more compelling.
Obviously, it all stems from Brexit but broken down I see it being a little like the child with his finger in the dyke.
The optimism that followed the agreement to move to stage two has quickly dissipated driven by the realisation that the only way the UK could reach an agreement was to acquiesce to every condition demanded by Brussels. The recent comments from both sides regarding the treatment of financial institutions speak volumes. The UK makes a concession to, presumably, smooth the path of integration and Brussels counters with a threat.
Politics has branched out recently away from Brexit with the nonsense over Damian Green, but as has been seen with the DUP these issues can take on a life of their own. I believe that Theresa May’s position is more parlous than we imagine and that she has “sold her soul” to remain in situ both within her Cabinet and with backbenchers. A general election in the first quarter is not necessarily my base case but it can surely be only a matter of time before the gang of three decide to “divvy up” the three top jobs and allow her to disappear quietly into the night.
The economy continues to falter as Q2’s GDP is revised up then Q3’s disappoints. There is I no doubt that investment is slowing. The FD’s and CFO’s I talk to who may even have favoured Brexit originally are now deeply concerned about what they will be faced with going forward and are holding back on investment, happy to “tread water” until the situation becomes clearer. These same people also claim that the employment market is nowhere near as tight as the government’s data claims it to be, and not simply due to the availability of labour from the EU.
The Bank of England has shed a great deal of credibility and given back the benefit it derived from becoming independent, even if that was twenty-five years ago. The disconnect between government policy and monetary policy is stark and the simple act of writing to the Chancellor explaining why inflation is above target and suggesting what the MPC intend to do about it is farcical.
With a fall predicted for the dollar, any devaluation for sterling will be less severe versus the greenback than against the single currency. I am not one for predictions but can see parity versus the euro, particularly if inflation starts to pick up in the eurozone and an interest rate hike becomes a possibility or accommodation is withdrawn more rapidly than expected. Against the dollar I can see 1.3000 tested but not much more.