Pound Heads for Fifth Quarterly Decline versus Greenback

Sterling is worst performer among a basket of 16 major currencies this year

The British pound sterling is heading for its fifth quarterly decline versus the U.S. dollar, the longest run since 1984, as the currency bears the negative impact of the U.K.’s decision to leave the E.U. The sterling is the worst performer among a basket of 16 major currencies so far in 2016, having tumbled the most on record against the U.S. currency on June 24th, 2016, when Britain’s decision to quit the world’s largest trading bloc became clear. It touched a three-decade low in early July 2016.

During August 2016, the sterling recovered some of its post-Brexit losses, when the first economic data covering the period since the referendum came in stronger than analysts forecasted. However, the currency again declined in recent weeks amid speculation that the country was heading for a swift exit from the E.U.

The sterling remains very vulnerable in the face of a change in monetary policies associated with the country’s trading relationships with other European nations. Over the next couple of months, the sterling is expected to face pressure from progression of talks on the Brexit issue. The pound was little changed at $1.2994 as of September 30th, 2016, down 2.2% since June 30th, 2016. On July 6th, 2016, the sterling dropped to a 31-year low of $1.2798. The sterling was at 86.12 pence per euro, from 86.13 pence on Tuesday, September 27th, 2016.p1

Pound’s worst run since the 1980s

The sterling bore the brunt of investors’ anxiety regarding the Brexit vote after the date of the June referendum was set in February 2016. With the result too close to call for months, the pound witnessed major fluctuations after surveys showed support for either Britain staying within the E.U. or against it. It remains vulnerable to abrupt changes in sentiment as Britain prepares to start implementing its exit from the E.U., heading for the fifth quarterly loss.

The Bank of England (BOE) Deputy Governor Minouche Shafik said on Wednesday, September 28th, 2016, that more easing will probably be needed after the “sizable economic shock” of the Brexit vote. After cutting the key interest rate for the first time in seven years in August 2016, BOE policy makers led by Governor Mark Carney have said there is a chance of another cut in rates as they assess the potential longer-term fallout from Britain’s decision to leave the E.U.

With the prospect of an extended aftermath from the decision, the BOE may further cut the key interest rate. In August 2016, the regulator reduced the rate for the first time in seven years from 0.5% to 0.25%. “It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity does not turn into something more pernicious,” Shafik stated in a speech in London.

Source: Bloomberg
Source: Bloomberg

Due to currency fluctuations, petrol and food prices are rising, highlighting the negative impact of the Brexit vote on the British economy. The pound has fallen by nearly 10% against the U.S. dollar since the June 2016 referendum, thereby making imports costlier for U.K.-based companies.

Weak pound stokes inflation rate

The sharp depreciation of sterling seen since the beginning of 2016 has put upward pressure on the consumer price index (CPI) through the continued import of goods that are in the basket of measured goods and services. British consumer prices rose 0.6% in the year to August 2016, unchanged from July 2016, while markets were expecting a 0.7% gain amid a weaker pound.

Transport prices rose further and cost of food fell at a slower pace, while lower prices for housing and clothing weighed on inflation. On a monthly basis, consumer prices rose 0.3%, following a 0.1% drop in the previous month. The core index, which excludes prices of energy, food, alcohol and tobacco, advanced 1.3% on the year, according to recent data from the Office for National Statistics.

Source: Office for National Statistics
Source: Office for National Statistics

While the full economic impact of the U.K.’s decision to leave the European Union will take time to fully be felt, it remains to be seen how the government unfolds its monetary policies to stem the sharp fall of the sterling.

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