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WhathascontributedtorecentSterlingweakness?
ManyMalteseinvestorswhohaveexposuretotheBritishpoundaspartoftheiroverall
investmentportfoliosmayhavenoticedasizeabledeclineinthevalueofSterlingagainstthe
eurooverrecentmonths.
Thebullrunsinceearly2009fromclosetoparityversustheeurowashaltedsixmonthsago
when,inmid-July2015,theexchangeratereachedahighofEUR1.4399foreveryGBP1(or
GBP0.6945perEUR1).Afterabriefdownturnoverthesummermonths,itthenre-testedits
multi-yearhighsinNovemberbutsincethenthevalueoftheBritishPoundslumpedbyover
10%totheEUR1.289level(equivalenttoGBP0.7758).
GiventheimportanceoftheperformanceofSterlingforMalteseinvestorsaswellas
businessownersandconsumersingeneral,itisworthanalysingthereasonsforsucha
downturninarelativeshortperiodoftime.
Currenciesarevaluedagainstoneanotherandthereforetheperformanceofacurrency
signifiesrelativestrengthorweaknessagainstanothercurrency.Inthiscase,themovement
oftheSterlingvsEuroexchangerateisdependentonfactorsaffectingtheUKeconomyas
wellasdevelopmentsacrosstheEurozone.
ThemaininfluentialfactorswhichcontributedtotherecentvolatilityinthevalueofSterling
aretheperformanceoftheBritisheconomyandexpectationsonthefuturedirectionof
interestrates,aswellastheuncertaintysurroundingBritain’smembershipoftheEU.
Ontheeconomicfront,theGovernoroftheBankofEngland(BOE)MarkCarneyhasplayeda
centralroleinaffectingcurrencymovements.Inthesummermonths,hehadsignalledthat
thedecisiontoraiseinterestrateswhichhavebeenonholdathistoriclowssinceMarch
2009,mightcomeintofocus“aroundtheturnoftheyear”.Withthemarketwidely
anticipatingthestartoftightermonetarypolicyinBritainsimilartotheUS,sterlingreversed
itsdownwardtrendandstrengthenedonceagainuntilmid-November.
However,theGovernoroftheBOEbacktrackedsomewhatoverrecentmonthsasplunging
oilpricesandslowingglobalgrowthstemmingfromadeterioratingChineseeconomyare
weighingoninflationexpectationsacrosstheUK.Thisbegantoleadtothedeclineinthe
valueofSterling.
Initslatestmonetarypolicymeetingheldlastweek,theBOEcutitsforecastsforeconomic
growth,inflationandwagesdueto“sustainedfinancialmarketturbulence”.MrCarney
statedthat“globalgrowthhasslowedagainoverthepastfewmonths,asemerging
economiesdeceleratedandtheUSeconomygrewlessthanexpected”.
TheUKeconomyisnowexpectedtogrowby2.2%thisyear,fromaprojected2.5%in
November.Economicgrowthin2017isexpectedtobe2.4%comparedtoanearlierforecast
of2.7%.
TheBOEnowexpectsanaverageinflationrateofonly0.8%thisyearclimbingtothe2%
targetin2018.
WhiletheBOEseemedtosignalthatinterestrateswouldnowremainonholduntilnextyear,
someeconomistsareexpectingthefirstratehikeinAugust2018whileothershavegoneas
farasforecastingthattherewillbenoratehikesuntiltheendofthedecade(i.e.2020).Such
anticipationsfromtheseeconomistsiswhatledtoafurtherweakeningofsterlingagainst
theeurosincelastweek.
Centralbanksallovertheworldaredeliberatinghowtohandleslowingconsumerprices.The
USFederalReservehassignalleditmaydelayafurtherratehikewhichwasanticipatedto
happennextmonthwhiletheEuropeanCentralBankiswidelyconsideringfreshstimulusat
itsnextmeetingon10March.Moreover,sincetherecentsurprisedecisionbytheBankof
Japantopushinterestratesintonegativeterritory,therewasspeculationthattheBOEwould
alsoconsidersuchamove.However,atlastweek’smonetarypolicymeeting,BOEofficials
quashedtalksofaratecutintheneartermastheyarguedthatkeepinginflationwithintheir
targetwouldrequiretightermonetarypolicy(i.e.higherinterestrates)overthenextthree
years.
However,MrCarneystatedthattheBOE“standsreadytotakewhateveractionisneeded,
aseventsunfold,toensureinflationremainslikelytoreturntotargetinatimelyfashion”.In
hislettertotheChancelloroftheExchequerGeorgeOsborne,healsosaidthatshould
“downsiderisksmaterialise,marketexpectationsofthefuturepathofinterestratescould
adjustfurthertoreflectanevenmoregradualandlimitedpathforbankraterisesthanis
currentlypriced”.ThevalueoftheBritishpoundwillremainverysensitivetosuch
statementsuntilsuchtimeasthefuturedirectionofinterestratesbecomesclearer.
InadditiontotheglobalheadwindsandtheimpactontheBritisheconomy,theother
importantfactoraffectingthevalueofsterlingisBritain’supcomingvoteonEUmembership.
Althoughuponbeingre-electedinMay2015,PrimeMinisterDavidCameronvowedtoholda
referendumbytheendof2017,thisisnowlikelytotakeplacebysummer2016.Sofarthe
GovernmenthasnotyetmanagedtoconcludeadealwiththeEUalthoughthisispossible
bytheendofFebruary.IftheBritishpeopleweretovotetoexittheEU,anewformoftrading
relationshipwiththeEUwouldneedtobefound.Theuncertaintyoverwhatthisrelationship
wouldbe,andthelengthoftimetoreachafinaldeal,couldleadtoheighteneduncertainty
andwhichwillnegativelyimpactthevalueofSterling.TheUSinvestmentbankGoldman
SachsclaimsthattheBritishpoundcouldcrashby20%iftheUKvotestoleavetheEU.
AnotherUSfinancialinstitution,CitiGroup,warnedthat“theeffectsofBrexit,ifithappens,
arelikelytobelargeandpainfulineconomicandpoliticalterms,bothfortheUKandthe
overallEU”.
Movementsinsterlingshouldbeofinteresttovariousoperatorsindifferentsectorsofthe
localeconomy.Amongthemostimportant,aweakeningofsterlingisnotnecessarilygood
newsfortourismoperatorsincludingthelocalhotelindustry.TheUKmarketremainsthe
largestsourcemarketforMaltaandaweakeningcurrencymakesaholidaytoanEU
destinationmorecostlyforBritishtravelers.However,thankfully,thisdoesnotseemtobe
havinganeffectonMaltaasrecentstatisticscontinuetoindicateanincreaseinoverall
tourismnumbersincludingfromtheBritishmarket.
Ontheotherhand,aweakeningsterlingmaybebeneficialforothersectorsoftheeconomy.
Thefirstthatcomestomindiscarimportation,morespecificallyrelatedtosecondhand
vehiclesfromtheUK.Therecentweaknessofsterlingisgoodnewsforsuchoperatorsas
Britishimportswillbemorecompetitiveandlocalconsumerswillbemorepronetofavoura
secondhandBritishimport.ImportersofothermerchandisefromtheUKincludingfoodstuffs
wouldverymuchwelcometherecentdeclineinthevalueoftheBritishpound.
Notwithstandingtherecentdownwardtrend,continuedvolatilityincurrencymarketsislikely
topersistespeciallyinthecomingmonthsaheadofthereferendum.Apartfromthefactors
impactingtheBritisheconomyincludingtheveryimportantreferendum,newsfromtheECB
willcontinuetoimpingeinasignificantwayonthevalueoftheeuroagainstallmajor
currenciesincludingSterling.Widemovementsincurrencymarketshasnumerous
implicationsforinvestors,businessesandconsumersandhencetheneedtocontinuously
monitordevelopmentsandtotakeappropriateactioninatimelymanner.
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