The British pound was up against the U.S. dollar Tuesday morning, trading at above US$1.33, after two days at 31-year lows. That may be good news for now, but it doesn’t mean the outlook for sterling is all too sunny.
“I wouldn’t put too much weight on this move — we’re in uncharted territory now,” ING chief international economist Rob Carnell told the Wall Street Journal Tuesday. “I wouldn’t be going out and filling my boots with sterling,” he said.
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The shockwaves of the vote for the United Kingdom to leave the European Union continue to shake markets and banks around the world, and Britain has been smacked with a lower credit rating and the threat of falling into recession.
In the wake of last week’s referendum result, the value of the pound plunged to its lowest since 1985, when it traded at US$1.05.
If the slide continues, some analysts have envisioned it spending much of the next six months in the $1.20 to $1.30 range — or even going as low as hitting parity with the greenback by the end of the year, according to a report Monday from MarketWatch.
The pound may not necessarily reach that level, but no one appears to be predicting it will strengthen until the political situation is sorted out.
Currency fluctuations, even dramatic ones, aren’t just a part of the overall economic shock but also a part of the economy recovering from that shock, Conference Board of Canada deputy chief economist Pedro Antunes said.
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“The market adjustment that we’re seeing in the exchange rate right now, this is a shock absorber of sorts,” Antunes told Global News in a phone interview Monday. “We have seen markets and economies that have free floating exchange rates take big hits — including our own currency, which took a very big hit in late 2014 to adjust for much weaker oil prices.”
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HIstorically, the Canadian dollar has been hit in times of uncertainty more than currencies that are seen as more stable.
He said the current situation is reflective of a greater environment of uncertainty and global political risk.
Among that uncertainty and risk: will other EU members hold their own votes on pulling out – and what would happen if the unconventional Republican candidate — Donald Trump — is elected president of the United States?
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“I think on a relative basis, it really does make Canada look quite solid when you consider the lack of any political turmoil within our borders.”
Although banks and economists expected a period of political and economic uncertainty following the vote to leave the EU, Theoret said it’s not likely to ease for a while yet.
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The U.K. will have to go through formal negotiations to exit the EU and the governing Conservatives will have to choose a new leader who will become prime minister following the resignation of David Cameron. And negotiations to leave EU likely won’t begin until after Cameron’s replacement is chosen.
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The country is also faced with having to negotiate a slew of new trade deals it once had within the EU or bilateral agreements non-EU governments had with the EU.
“They’re in this weird kind of purgatory right now,” Theortet said.
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