By Iain Mackenzie, head of treasury at Canaccord Genuity Wealth Management
STERLING has fallen to a seven-year low against the euro after UK Prime Minister Theresa May announced her Brexit timetable earlier this month. But the pound’s further fall towards parity with the euro should be seen in a wider context, and is not all bad news for the UK.
Mrs May’s speech suggested an assertive approach to Brexit, indicating that Article 50 would be invoked by the end of March 2017, which would be of some relief to investment markets.
Markets do not like uncertainty, and March 2017 gives a defined period of worry for the market to focus on. A hard Brexit seems more likely at this stage, contrary to rumours of a soft Brexit or even a legal challenge to the referendum result.
While there will be some lifestyle impact of sterling’s fall, there were still some positive signs.
The pound has found it difficult to make headway, which is not good if you are planning a holiday or buying a new car from Germany, but in terms of underlying recovery, retail sales are still moving along quite nicely.
Also, the UK may be in a stronger bargaining position than originally thought when it comes to negotiating factors such as rules, regulations and cross-border tariffs.
In the short term, UK Chancellor Philip Hammond has warned of turbulence in the coming months, but he is expected to offer fiscal stimulus measures in his autumn statement on 23 November.
While the market expects further declines in sterling, particularly in relation to the US dollar, against which the pound has seen fresh 31-year lows, there will be a point when sterling becomes a ‘buy’ on recovery expectations.
Until that happens, there is some comfort in that sterling’s fall helps exports, boosts tourism and perhaps in due course, inward investment.
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