-
""

Positioning for sterling volatility

23 May 2019

Since the Brexit referendum in June 2016, it would be fair to say that sterling has experienced, as many expected, a troublesome time.

In the four months following the vote, sterling dropped by over 15% to a monthly average of $1.2183 against the US dollar in October 2016 versus $1.4358 in the decisive month. On the day after the vote alone, sterling had actually dropped just under 8% when compared against the dollar (1.3626 v 1.4807).

This hardly seems surprising given the unprecedented political and economic landscape the UK was and is still, facing. The Bank of England was quick to cut rates from 0.75% to 0.25% and withstood a considerable inflation overshoot, stemming from the significant depreciation in sterling.

Turbulent ride

What is more interesting however is the turbulent ride that the pound experienced since October 2016, including its rise up to early 2018 to close to pre-Brexit levels. This included a period consisting of a general election under which May only just managed to stay in power, with the caveat that she needed a coalition with the Democratic Unionist Party. Partially explaining this move was the Bank of England hiking rates in November 2017 to 0.5% as a result of surprising economic resilience and the aforementioned inflation overshoot.

Such a recovery in our view always appeared unsustainable with Prime Minister May continuously battling her own cabinet, her own party, the opposition parties and the European Commission.

It did not take long for markets to realise this. What followed was a downward trajectory where May managed to agree a deal with the EU but get it rejected three times in her own parliament. Any other suggestions from MPs (be it binding or non-binding) also failed to get a majority in the house.

Whilst not at its October 2016 levels, the pound is now below $1.27 and as of 23 May, had been beaten by the euro over the last thirteen sessions. Putting this into context, this is the worst run since the euro’s inception.

Downward but volatile history graph

Outlook for sterling

As investors are growing frustratingly used to, twists and turns are inevitable in the Brexit backdrop. Theresa May added to this on Tuesday with the inclusion of a vote on a second referendum (sterling rallied when this happened), only to come back down when it was realized said vote would only occur should her bill pass.

Consequently, the spectrum of outcomes remains as wide as possible, ranging from no Brexit to no deal. The latter is a lot more likely should May depart from office without securing a deal, as the chances of her being replaced by a Eurosceptic candidate increase.

Furthermore, getting a deal through parliament is the “easy” part. There is likely to be two years of transition fleshing out the exact nature of the trading relationship between the eurozone and the UK.

In light of these factors, a sustained period of increased volatility in sterling seems plausible.

Implications for investors

At a time of much uncertainty, taking a position on the UK currency either way is likely to place too much importance on getting the call right when uncertainty dominates the decision.

As a result, we feel it is best to be positioned in a way to withstand the volatility in sterling as opposed to taking a bet.

Related articles

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.

THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.