Investment Clock insights

Sterling rallies but we’re not convinced


Hiroki Hashimoto, Senior Quantitative Analyst

16 October 2017

Sterling has been one of the best performing developed currencies last week, as Prime Minister May survived the attempted leadership coup and some reports suggesting that EU Brexit negotiator Barnier could be open to starting trade negotiations.
However, we are sceptical that a sustained upward move in sterling is underway. Sterling exchange rate volatility remains elevated relative to the global average (see chart); that suggests markets remain nervous about the UK political situation. While the Bank of England has signalled its intent to raise interest rates in November, we don’t expect this to be a start of a new tightening cycle as excessive tightening can be counter-productive if it weakens the growth outlook. Our multi asset funds remain underweight UK stocks and underweight sterling.

Sterling has been one of the best performing developed currencies last week, as Prime Minister May survived the attempted leadership coup and some reports suggesting that EU Brexit negotiator Barnier could be open to starting trade negotiations.

However, we are sceptical that a sustained upward move in sterling is underway. Sterling exchange rate volatility remains elevated relative to the global average (see chart); that suggests markets remain nervous about the UK political situation. While the Bank of England has signalled its intent to raise interest rates in November, we don’t expect this to be a start of a new tightening cycle as excessive tightening can be counter-productive if it weakens the growth outlook. Our multi asset funds remain underweight UK stocks and underweight sterling.

Chart: Sterling Volatility and  JPM Global FX Volatility

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.