The crashing pound is 'both a symptom of Brexit concerns and also part of the cure'

It’s been a rough couple of days for the British pound.

The currency tumbled to a 31-year-low against the dollar after Prime Minister Theresa May’s weekend statement that Article 50 would be triggered by the end of March 2017, beginning the official process of Britain leaving the European Union.

There were also recent reports that the UK could be heading for a”hard Brexit” — or a deal whereby the UK would pull out of the European single market, which in turn would allow the government to end the free movement of people.

The pound hit an intraday low of 1.2736 against the dollar on Tuesday, below the post-referendum low of 1.2798, and is
now dangling around 1.2755 as of 1:51 p.m. ET.

However, not everyone’s feeling so glum about the currency’s plunge.

In a recent note to clients, Capital Economics’ Julian Jessop noted that “it is true that, at around $1.27, the pound is now the weakest it has been on this basis since 1985. However, this is only part of the story.”

Looking at the chart shared by Capital Economics below, you can see that the pound has actually been weakening against the dollar since about 2014 when it was around $1.70. Jessop adds that you can even argue it’s been falling since 2007, when it was around $2.10 — which suggests that if the currency dips further to, say, $1.20, that’s not such a huge drop. Relatively speaking.

Moreover, it’s notable that while sterling has fallen to a 31-year-low against the dollar, it’s only fallen to a 7-year-low against a basket of major currencies, added Jessop. And that, in turn, “could simply be seen as the reversal of the sharp appreciation from mid-2013 to late 2015. This is a welcome development — at least for UK exporters.”

Still, inflation will likely be higher over the next year or so than it would have been otherwise, added Jessop.

“But there is little risk that this will prompt a hike in interest rates, as might have been the case during a true ‘sterling crisis.’ Instead, the fall in the pound is still largely a consequence of the prospect that the Bank of England will keep monetary policy looser for longer to cushion the economy,” he added.

“Sterling’s weakness is therefore both a symptom of Brexit concerns and also part of the cure.”

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