The pound has reversed its recent weakness. Its momentum may be tentative, but it could herald a new era for UK assets.
- The pound is the best performing developed market currency for the year to date.
- The IMF has said that UK GDP is likely to contract by 0.3% in 2023, less than the 0.6% predicted in January
- The pound peaked at over $2 in December 2007, but has been weakening ever since, hitting as low as $1.07
The recent strong run for the pound means it now wears the crown of the best performing developed market currency of the year. This is perhaps surprising when investors contemplate the many structural problems that now face the British economy, but perhaps less surprising when set against its extreme weakness over recent years.
The pound’s strength is in part, a response to some stabilisation in the political landscape, a better deal on Europe and a sense that, while not good, the economic outlook is not as dire as it was a few months ago. The IMF has said that UK GDP is likely to contract by 0.3% in 2023, less than the 0.6% predicted in January. The UK’s upgrade was the biggest among the G7 and it no longer compares as unfavourably with its peers. For example, the IMF predicts that Germany’s economy will also contract this year, although only by 0.1%.
It is also worth noting how much the pound had fallen. The pound peaked at over $2 in December 2007, but has been weakening ever since, hitting as low as $1.07 in September 2022. At the time of the Brexit vote in 2016, one pound was worth around $1.40. On almost all measures the pound was undervalued and set for a reversal.
The pound has also been given a boost by the weakness of other major currencies. The Dollar has weakened against most currencies as other central banks have caught up with the Federal Reserve on interest rates. In particular, the relative stickiness of inflation in the UK versus an apparent reversal of inflationary pressures in the US has made it likely that the Federal Reserve may cut rates sooner than other major central banks.
It has also been driven lower by data releases showing the economy slowing: The ADP Employment Change for March, for example, was well below expectations, while manufacturing data has also been weak. There are expectations that the next round of inflation data will continue to show price rises slowing, making it easier for the Federal Reserve to pivot.
Sterling’s continued strength against the Euro appears less assured, with Europe seeing many of the same economic patterns as the UK. However, sterling’s reversal, even if it is tentative, may change the game for UK assets, removing a major disincentive for international investors. It may also be a sign of a wider revival in confidence in the UK.
