Sterling Considerations

Article written by Antoine Briffa

Maltese investors currently have a dilemma when mulling over sterling investments. While it is true that the pound has rarely seen such weak levels, the last time the pound traded at similar levels was in 2010, there is no guarantee that the direction will change anytime in the near future.

Thus while investors in UK equities have gained 6.9 percent since June, they have also lost 7.3 percent due to currency movements relative to euro holders. Indications of a hard divorce with the EU continue to weigh on the kingdom’s economic potential and long term outlook. Deciding whether it is an opportunity to buy or the last chance to run away has never been harder.

Currency Forecasts

Sentiment is starting to recover slightly but remains near post-BREXIT lows. Uncertainty about the UK economy’s future relationship with the UE may weigh on the currency further. The British Prime Minister’s strategy appears to put migration limits ahead of access to the single market. Both are detrimental to the Kingdom’s economic potential.

This gloomy outlook appears to already be discounted in the exchange rate. Technical levels indicate a trading range between 0.87 and 0.91 against the Euro. Near-term a moderate rally is possible. The risk is a broader loss of confidence in the UK if negotiations with the EU turn into a squabble.

From a technical perspective the chance of a rally is much higher than a chance of further currency deterioration. However, data is significantly biased by the massive movement observed recently.

Determinants of direction

Without any doubt difficulties in negotiating BREXIT will have the most impact on the sterling. The full impact probably still needs to be priced in.

Till now data has mostly surprised to the upside since the referendum. Economic data is expected to deteriorate in 2017 as investment slows down weighing negatively on the currency.

A possibly expansionary fiscal and monetary policy stance to support economic activity would put further pressure on the currency.

A possible rate hike in the US and eventually QE tapering by the ECB would raise the relative value of the dollar and the euro. These will contribute to further downside in the sterling.

Base currency considerations

A huge determinant influencing investment decisions, in this case, is the individual’s long term intentions on the currency. Those that have a time horizon on their investments need to monitor closely current events, as the economic implications from the political manoeuvring will be substantial.

Holders of sterling investments or cash that have already decided to remain invested in the currency for the long-term, need to bother less about the exchange rate movements. Equity holders are expected to be the winners exchange considerations will have a significant impact on the bottom line.