Nizar Al Aridi  is Senior Advisor, at ADS Securities
Nizar Al Aridi is Senior Advisor, at ADS Securities

Where next for Sterling?

It has been a torrid few months for the pound, with the outcome of the Brexit referendum providing the fi rst of a series of notable legs down for the pair. Cable for example may be trading a few cents above those 31 year lows of 1.20 which were touched in the wake of the “flash crash” at the start of October, but does sterling deserve to be looking so depressed as 2016 comes to a close?

First Published: e-Forex Magazine 74 / Currency Clips / December, 2016

It has been a torrid few months for the pound, with the outcome of the Brexit referendum providing the fi rst of a series of notable legs down for the pair. Cable for example may be trading a few cents above those 31 year lows of 1.20 which were touched in the wake of the “flash crash” at the start of October, but does sterling deserve to be looking so depressed as 2016 comes to a close?

Granted there are huge swathes of uncertainty in play, primarily revolving around how the Brexit process will work in reality and what UK trade agreements will look like once the dust begins to settle.

Indeed there are further legal challenges on the table with lengthy reviews being tabled both over how Article 50 can be triggered and also whether membership of the European Economic Area has to be relinquished at the same time as that of the European Union itself. It’s no secret that markets dislike uncertainty, but pitched against some of the other risks that currently sit on the global agenda, it does look as if sterling has taken a pounding.

The next nine months or so see a whole raft of high profi le elections across the Eurozone and given the popular votes we’ve seen returned in both the UK and the US in recent months, it would be foolish to think that the status quo can be maintained. There are very real risks that the grand aspirations of a unifi ed Europe will – at least for some time – turn into a coordinated fire-fighting exercise, especially if we see a swing to the right in German, Austrian and French elections.

Then let’s look at the US, where Donald Trump’s victory has left markets cheering the probusiness rhetoric that is likely to follow, but questions certainly need to be asked about how this agenda – and plans for a sharp increase in national infrastructure spending – can be funded. Cable is taking a beating on the basis that the Federal Reserve will be hiking rates in the short term, but the central bank still has so little room for manoeuvre if it needs to slacken monetary policy that this could well end up looking like a classic suckers’ rally.

All this is happening whilst the Bank of England fronts up to those growth projections from the offi ce of budget responsibility (OBR) that despite Brexit, are ahead of even Germany’s numbers. On top of this there are mounting infl ationary pressures to contend with – which can be countered by UK rate hikes – and the fact that the UK’s navigation out of the EU looks far less painful than some of the political battles that other member states now need to square up to. Sterling has been marginalised through a torrid 2016 but it’s diffi cult to see where the downside can lie from here.