Optimism or pessimism

8 July, 2016

Tom Arnold

This week the markets have been completely dominated by further fallout from the Brexit vote and the continuing power struggle to see who will lead the Conservative party and therefore the country.

Early in the week all of the focus was on Mark Carney and the Bank of England, when the governor delivered his biannual financial stability report. As you would expect the entire report was dedicated to the Bank’s plans to deal with the fallout of Brexit, and governor Carney once again showed what a good central banker he is, with decisive action and an obviously well thought out plan. Our banking sector was first to be firmed up with increased liquidity thanks to the removal of balance sheet restrictions and there was also confirmation that we should expect action from the Bank in the coming weeks in the form of interest rate cuts and/or additional Quantitative Easing.

The Pound obviously dropped as a result of this, because both interest rate cuts and QE are currency-negative, but critically it did not “bomb out”, presumably taking some stability from the fact that the man at the tiller of the UK economy knows what he is doing.

The latter part of the week was dominated by the final narrowing of the field in the race to be the UK’s prime minister. We now find ourselves with a final two – Theresa May and Andrea Leadsom – which means we will have a female PM for the first time in 25 years. The two candidates whilst sharing many views, are being pigeon-holed as being a “pessimistic remainer” (May) versus an “optimistic leaver” (Leadsom).

Mrs Leadsom was quick to correctly point out that what the markets need most is certainty and decisive action, but from there went a little off track, by suggesting that the Pound had only moved “a bit” and was “incredibly resilient”. We are currently 12% down against the Euro and the US Dollar on where we were pre-referendum, which for someone looking to buy a property in Portugal for €200,000, equates to a £20,000 price increase. More than just “a bit”. The Governor of the Bank of England confirmed we are in the most volatile time ever for Sterling at present, and with the 12% drop against the other majors, I think it might also be a bit too soon to suggest the Pound is being “incredibly resilient”. Remember all of this movement has come as a result of the uncertainty of maybe triggering Article 50 and leaving the EU, imagine what happens when we actually do pull the trigger…

I am all for putting a brave smile on my face and making the most of a tough situation, but blind optimism is just stupid – realism is the key at the moment. Barring an incredibly unlikely decision to cancel Brexit we have uncertainty in our future for years to come. A decision on our next PM, might help a bit, but triggering Article 50 will almost certainly cause a further significant drop in Sterling’s value. Do not fall into the trap of thinking it will all settle down and be OK in a few weeks – it won’t. If you have an upcoming currency transaction, you need to make a decision now.

Across the Currency Index trading floor in the last few days I have heard a mix of clients pulling out of property searches, and those who are making a lifestyle decision and are going no matter what the extra cost. Every single one of these clients is being given expert guidance as to their options and our expectations for the market’s movements and can be safe in the knowledge that their currency transfers will be handled as best as they can be in difficult times. Make sure you stay in close contact with your CI account manager, so you can make the best decision for your circumstances.