Last week was the largest weekly fall in sterling in seven years. Sterling has been this year’s worst performing major currency against the dollar. The pound dipped below $1.40 for the first time since 2009 and hit a low of $1.3836. So far this year sterling has fallen by over 6% against the dollar and is down almost 13% relative to its high last June ($1.593). A number of factors have been weighing on sterling sentiment in recent weeks. These include: market concerns over the scale of the UK’s current account deficit and financial markets pushing back their expectations of when the Bank of England will begin hiking interest rates. Meanwhile the forthcoming EU referendum on the 23rd June is also a source of political risk and financial market volatility.
During previous crises, sterling has lost at least 25% against the dollar in six months during collapses in 1981, 1992 and 2008. Meanwhile on six other occasions since 1975 there have been falls of around 15% over a six month period. According to a recent Bloomberg survey, 29 out of 34 economists polled saw sterling falling to $1.35 or below within a week of a vote to leave. Only one economist survey expected sterling to be above $1.40.
Sterling’s weakness has also been marked against the single currency. The pound has dropped from €1.43 to €1.261 in just 3 months. Measures of Euro / sterling exchange rate volatility over the next 6 months are at levels not seen since the Eurozone debt crisis in 2011. Uncertainty is the new certainty over the coming months.