Sterling declined by some 2.4% against the US dollar in the direct aftermath of the UK General Election, plummeting to a low of 1.2635 as markets and investors absorbed the news of a potential hung parliament, which without a doubt was cited as being the worst-case scenario for the UK with the impending Brexit negotiations just around the corner.
Following a brief few days of consolidation the currency pair has since been on a rollercoaster ride, one that is unlikely to end anytime soon. In the past couple of weeks, we have seen the currency pair trade as high as 1.2818 and as low as 1.2589, driven by both political and economic factors.
Those who favour a stronger pound will have taken some optimism from the Bank of England’s recent monetary policy meeting, as despite leaving the rates unchanged, there was a shock in that three of the eight members voted to hike rates, with another member and chief economist Andrew Haldane stating that he too was close to opting to hike rates.
On the other side of the pond, the US Federal Reserve did once again increase their benchmark interest rate, however this had been priced in and so the dollar didn’t exactly soar in FX space.
So where are we likely to go next? As has been the case post-referendum, making accurate predictions are tough as no one knows how the Brexit negotiations will ultimately play out. Theresa May’s government has finally struck agreement with the DUP so the UK now has a ‘stable’ government in place which should provide investors with some confidence for the short term at least.
Some of the bigger institutions, including Barclays and Danske Bank, see the pound returning to the 1.2900 handle by the end of 2017 and I am inclined to agree. Considering GBP/USD traded as high as 1.3050 ahead of the General Election, albeit when the general feeling was Theresa May would increase her majority, I don’t think 1.2900-1.3000 is out of the question at all, provided that we see no troubling disagreements or massive obstacles that could put an amicable and smooth Brexit process in jeopardy.
Without a doubt the next few months, and the remainder of 2017 for that matter, are likely to remain volatile for sterling with so much resting on the Brexit negotiations, but also through economic factors both in the UK and the US.
That is why having a strategy in place to manage currency risk effectively is so important now more than ever. For buyers of US dollars, it has been a painful ride over the past 12 months, but there have been and no doubt will be occasions where we see the pound rally. On these occasions it’s crucial to have a trusted FX broker who can monitor and contact you when these more favourable situations arise.
For businesses that trade internationally, limiting exposure to currency markets through a robust hedging strategy is now more important than ever.
Brett Thomas is head of dealing at Godi Financial