Surprising strength for the Pound

2 September, 2016

Tom Arnold

The last couple of weeks have seen some much needed stability for the Pound following the Brexit vote, mainly as a result of some solid UK data, in the form of retail sales, unemployment and inflation. However, the underlying tone has very much been one of calm before the “Article 50 storm”, with the constant fear that the actual divorce from Europe will cause a recession and various other gloomy knock-on effects for the UK economy. Prime Minister May and her cabinet have in fact been meeting this week to begin making their plans for Brexit, with the PM reiterating her stance of Brexit means Brexit, and so one might have expected the Pound’s recent run of form to be quashed as a result…

The UK economy however, decided to throw up something of a shock… Yesterday’s manufacturing PMI data, showed a massive jump up to 53.3 from last month’s figure of 48.2 – in fact the largest single month change in 25 years – which gave the highest reading for almost a year. The European and US markets also threw in some aid for the Pound, posting their own equivalent numbers in lower than expectations.

Sterling soared as a result, increasing by 1.5 cents against both the Euro and the US Dollar. Some analysts pointed towards expectations of further easing action from the Bank of England now being put back or even cancelled and this further supported the Pound’s gains. The IMF even came out and said fears over Brexit seem to have subsided… Great news!

However, the reality is that there is still a huge amount of uncertainty out there and when Article 50 is triggered the Pound will almost certainly take another battering, so this jump in rates is likely only a short term spike in an otherwise negatively trending market.

Today sees the UK Construction PMI number out this morning, before focus moves over the Pond for the biggest monthly release from the US, in the form of non-farm payrolls this afternoon. NFP is always a cause for volatility, so even if the earlier UK PMI figure gives a further boost to the Pound, the US will likely take centre stage as the day progresses.

Make sure you stay in close contact with your Currency Index account manager to be kept informed of exactly what is happening and what your options are for your upcoming currency requirement. The current Sterling spike could well be a good opportunity to look at securing your currency, even if you don’t need it right away – ask your account manager about whether a forward contract could work for you.