The truth is that the domestic economy has been performing better than expected up to this point given the possible risks ahead. As an economist though I have attribute this to the cheaper Pound; the depreciation of a currency always allows an economy to perform better at fi rst as it becomes more competitive against its peers but this effect has an expiration date.
Unfortunately the positive effects of a cheaper Pound are now beginning to fade; recent reports indicate that the services and manufacturing sectors are losing traction, wage growth is stagnating and retail sales are on the decline.
At the same time, a weakened Dollar at the start of the year allowed Sterling to appear rather resilient while the UK stock market had been posting fresh highs. However, I am afraid that this might have created a mirage effect for many investors. It is now clear that the underperformance of the Dollar and the rallies in the stock markets have been fueled by misplaced expectations over the US Federal Reserve’s plans for hiking interest rates in the States.
When investors began to realize that the likelihood of a higher interest policy in the US is much higher than initially anticipated the readjustment of their proDollar bets started weighing down on the Pound.
Furthermore, the political scene is another cause for concern; recently Scottish PM Nicola Sturgeon reiterated her view that a fresh independence referendum is justifi ed after UK’s decision to leave the EU. Scotland plays an important part in the UK economy with significant oil resources located at its North and the implications of a possible secession cannot be easily quantifi ed. Any political turmoil on this front will take its toll on the Pound moving forward.
From a technical standpoint, the Pound doesn’t look strong either, February’s 1.2350 lows have been breached lower clearing the path towards the 1.2150 - 1.2250 area of support. Below that the next support lies at the 1.2000 yearly lows which is quite a signifi cant drop.
All indications point towards a challenging future for the Pound in the weeks ahead.