Sterling drifts lower as possibility of ‘hard Brexit’ grows

October 10, 2016

Sterling took another step down last week following an unexplained (No specific news or action has been attributed to causing it) flash crash overnight on Friday, falling 6.1% to as low as $1.1841. While there was an initial rebound, erasing most of the fall, the rate has continued to drift lower with many expecting further weakness. Several more aggressive pre Brexit sterling expectations have already been breached, and some commentators have speculated that sterling’s final low will be near parity with the US dollar. Increasing political noise and a greater possibility of a “hard Brexit” has been the greatest contributor to sterling weakness. While a weak currency will be a boost for exports, a price will be paid through higher inflation over the coming years. The Bank of England estimates that 30-40% of a change in exchange rates will flow through to inflation. This implies an additional 4-7% of inflation in the shorter term.


US non-farm payrolls increased 156,000 in September, just short of expectations. Given the volatility of the data month on month as well as other market distractions, the news did not concern investors. The jobless rate increased slightly to 5%. Importantly average hourly wages increased by an annualised rate of 2.6%, giving a further indication that the labour market is tightening. A tighter labour market will pressure employers to put up wages and may force the Federal Reserve to increase interest rates faster than the market currently is anticipating.


The US presidential elections heated up last week as more negative press for Donald Trump continues to show that he is his own worst enemy. This meant that the Republican went into Sunday’s debate more aggressively, looking to highlight his opponent’s indiscretions and her husband’s, and attempting to diminish his own. Importantly, his comments appear to be too much for some senior Republicans, with many withdrawing their support. Only time will tell whether this latest episode will be enough to swing the election in favour of Mrs Clinton. Currently, very little volatility is being priced in around the election date meaning a Trump victory will surprise markets.


Index Open Close Change % Change
FTSE 100 6899 7044 145 2.10%
S&P 500 2168 2153 -15 -0.69%
Dax 10511 10484 -27 -0.26%
Cac 40 4448 4444 -4 -0.09%
Nikkei 225 16449 16860 411 2.50%
UK 10 Year Gilt Yield 0.737 0.987 0.25 33.92%


The Bank of England interest rate decision is announced on Thursday along with German CPI.