LONDON — Since Britain voted to leave the European Union last June, the pound has been on a wild ride, enduring a more than 15% drop against the dollar that has included a flash crash, frequent fleeting surges, and a total realignment in the way the markets look at the currency.
However, in the past couple of weeks, the pound has started to look a little more normal in the way it has traded during big events.
Having previously been a cyclical currency, and moving on major economic events like data releases and interest decisions, in the second half of 2016 sterling became part of a growing trend of currencies being driven not by such events, but rather by political developments, especially those related to Brexit.
This is something keenly observed by analysts at HSBC, who wrote in November:
“The UK was perhaps the clearest example of political drivers taking over. GBP had been a cyclically driven currency, with interest rate differentials dominating cable’s movements. But from the start of 2016, the UK’s referendum on EU membership started to dominate the market. This political event shone a bright light on the UK’s structural imbalances.”
Now, there is no real arguing with the assertion from many that “politics is the new economics” in the markets, as the likes of President Trump, French elections, Brexit dominate the discourse. However, signs are starting to emerge that the pound may be entering a period of relative normalcy.
Looking at major events in the past handful of weeks, sterling’s reaction has been much more placid and predictable than has been the case since last June.
On both Monday and Tuesday PMI surveys from IHS Markit — traditionally the sort of data release that moves sterling — disappointed against forecasts. The pound has dropped sharply on both occasions, as would normally have been expected. On Wednesday, the opposite occurred following the UK’s services PMI release. The data was better than expected, the pound jumped.
In the last few months, sterling investors have almost entirely looked through unofficial data points like PMIs. By contrast, any Brexit related news has caused significant moves in the pound against the dollar.
Thursday, November 3, 2016, provides a perfect example.
On that day, at 10.00 a.m. GMT (5.00 a.m. ET) the pound jumped after the High Court ruled that the British government could not begin the formal process to leave the European Union without first having a vote in parliament.
Last week, however, when Prime Minister Theresa May triggered Article 50 of the treaty on European Union, formally beginning the process of Brexit, sterling barely budged.
Of course, the triggering of Article 50 was pretty much a symbolic event. Everyone knew that it would happen, and when it would happen, having been telegraphed nine days prior to the actual announcement.
Regardless, only a few months ago — before the initial risks of Brexit had been priced into sterling forecasts — the announcement would likely have triggered some sort of knee jerk reaction in sterling’s price.
Now that Article 50 has been triggered, it looks like there will be a couple of months at least before negotiations begin earnest, especially with the prospect of the French presidential election looming large in the consciousness of the EU, a point made by strategists from BNP Paribas this week.
“Ahead of key elections in Europe this year we do not expect much negotiation progress,” Clara Leonard, an FX strategist with the bank writes. “Our economists expect Brexit negotiations to only start in early June.”
This is likely a good explanation for sterling’s relatively calm demeanour in the past handful of weeks.
Of course, once negotiations begin in earnest, all bets are off. Talks could start on good terms or bad, early bumps — like the UK’s divorce bill — could be ironed out quickly, or take as long as six months (as chief EU negotiator Michel Barnier expects).
But for the time being, with no real developments likely coming up for some months, sterling should sail calmer seas. For a little while at least.
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