Pound falls lower than Dollar & Euro

The pound has fallen below $ 1.29 for the first time in almost a year on continuing worries that UK will leave the EU without a trade deal. Sterling also fell to a nine month low against the euro and was down against the yen and Swiss franc.

Background

The pound fell dramatically in value following the vote for Brexit in June 2016 and continues to remain under pressure with less than a year to go before Britain officially leaves the EU. Although sterling started 2018 as one of the top performing currencies, weak first-quarter economic growth figures prompted it to fall to a five-month low at the end of May. Sterling was trading at $1.335 against the dollar, its lowest level since December 2017.

Analysis

The uncertainty revolving around Brexit without a trade deal has deeply affected the market. The Pound Sterling in addition to its fall against the dollar and euro was down against the yen and Swiss franc. Bank of England governor Mark Carney expressed that the chances of a no-deal Brexit were "uncomfortably high". International trade secretary Liam Fox also stated that the odds of the deal is at "certainly not much more than 60-40".

Christophe Barraud, an economist at Paris-based brokerage Market Securities said that, "A lot of companies can't wait for the (Brexit) negotiations outcome in October, so of course are trying to hedge against a drop in the pound."  Neil Jones, head of hedge fund FX sales at Mizuho Bank also added that, "Some are thinking in the market that the BoE raised in order to given them ammunition to cut rates in the face of a 'no deal'.

On the contrary, despite the rise in UK interest rates the pound has fallen. The head of foreign exchange strategy at CIBC, Jeremy Stretch added that, “..unless the economic data in the UK starts to validate the rise in interest rates, it's hard to see the pound regaining any strength."

Assessment

Our assessment is that there are several factors that we will affect the parity of the currency. These include inflation or cost of living index. We believe that the lower than expected inflation will ease the pressure on Bank of England to raise interest rates. We believe that the pound and the euro may trade at par before the end of 2018