UK businesses worry about Sterling being at record lows against Dollar

Enrique Díaz-Álvarez18/Jan/2016Currency Updates

Sterling suffered very sharp losses against both the Euro and the US Dollar last week. Against the latter it is now flirting with the multi-decade lows it experienced in 2009 during the worst of the financial crisis. As a result, we’re seeing some nervousness among businesses about the sharp sell-off of the Pound. We, however, regard current levels of the currency as cheap in relation to the fairly positive fundamentals of the UK economy and given the current Bloomberg forecasts. The Euro/USD rate, however, remains range bound, seemingly impervious to the near panic scenes we are witnessing in some markets.

Overall, the new year hasn’t been kind to financial markets and risk assets, ignoring the stabilisation of the Yuan early in the week and generally positive news out of China. Stocks have seen just about their worst start of a year in history, with most major indices down double digit percentages in just the first two weeks. Since last week, major G10 currency trading, which remained resilient at first, has been affected.

Emerging market currencies and G10 currencies from commodity-exporting countries continue to reach new lows as commodity prices are plummeting. We’re quite impressed by the equanimity with which our clients are taking the sell-off. The general feeling as well as the flow we are seeing indicate businesses are willing to take advantage of these very cheap levels and hedge any future need for emerging market currencies.

Major currencies in detail:


The main news out of the UK last week was the meeting of the Bank of England. For the sixth straight month the lone hawk in the Bank of England, Ian McCafferty, maintained his vote for an immediate rate increase, defying some expectations for a 9-0 vote amid global economic headwinds.

Further, the accompanying statement was less dovish than the market had been expecting, albeit little changed on last month. A key sentence is that ‘since [the November inflation report], the data regarding international activity has evolved broadly as expected.’ This suggests that the BoE is taking recent market volatility in its stride and appears unfazed by the ongoing financial turmoil in China.

Policymakers suggested that the latest plunge in oil prices would provide good long-term support for spending in the UK, while recent Sterling depreciation would lessen the drag on inflation to some degree. These comments are an indication that a 2016 interest rate hike is still on the cards, as long as wage data doesn’t weaken materially and financial markets regain their footing.

We regard current Sterling levels against the Dollar and Euro as a great buying opportunity given the fundamentals.


By contrast to the BoE news, the latest ECB meeting minutes suggest that there was pressure from ‘some ECB rate setters’ to cut rates and expand quantitative easing more than the Council had decided. Recent financial volatility can only strengthen the hand of these doves, and we continue to expect further monetary stimulus in the first half of this year, dragging the Euro towards parity against the US Dollar.

The European economy has so far shrugged off the market turmoil but any weakening of the PMI business sentiment indices coming out this week will put massive pressure on the ECB to act soon.


The main news of the week was the release of the notoriously volatile retail sales number for December.

The headline numbers came out soft, which contributed to market nervousness and help send US stocks spiraling downwards. However, the details were more encouraging. The November numbers were revised higher, to 0.4% from 0.2%. The annual increase in retail sales, excluding autos and gasoline, which has plunged as the retail number does not adjust for inflation, is a healthy 3.9%.

We continue to place more weight on job creation numbers than any other indicator and expect the US economy to post growth in the 2-3% range for 2016, as long as the labour market continues to grow at 200,000+ net jobs per month.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.