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Pound on an eight year high: Riding high on positive investor sentiments?

Pound on an eight year high: Riding high on positive investor sentiments?

By Parush Arora

The most unanticipated episode post the 2008 Financial Crisis which might possess the potential to bring about structural changes in the global economy was the decision of British people to exit the European Union.

Though it might take some time for Britain to depart from the EU completely, its repercussions could be observed right after the results of the referendum.

A plummeting Sterling and escalating inflation were anticipated after effects of the Brexit. However, Theresa May’s speech on the 17th of January 2017 brought with it something which was completely out of the blues. The Sterling clocked up its biggest one-day sale since 1998, after her speech on Brexit. The local currency closed 2.61pc higher at $1.2383, marking its highest daily rise since 2008.

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The British public voted in favour of leaving the European Union in 2016. Photo Courtesy: Wired.

Reasons for the increase

The Pound Sterling took a spike of 1pc even before Theresa May commenced her speech, which was primarily due to the stronger-than-expected inflation.

This unexpected upsurge of 3% was due to the lucidity provided by her, concerning the approach and direction the government will pursue post-Brexit. The pound Sterling took a spike of 1pc even before Theresa May commenced her speech, which was primarily due to the stronger-than-expected inflation. The investors took this inflation as an additional sign that the upcoming step in interest rates would be an upward spiral, which in turn would strengthen the attraction of Sterling.

While laying down the 12 guiding principles for the upcoming negotiations, she assured the investors that both houses of the parliament will get to vote on any Brexit agreement, which also facilitated further strengthening of the currency. The final stimulus was provided in the form of the US dollars sell off propelled by the President-elect Donald Trump, who stated in his earlier speech that the dollar is too strong.

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Markets all around the world, and the value of the Pound had plummeted post Brexit. Photo Courtesy: Financial Times.

Reaction from the world

Prime Minister May’s speech got a mixed response from the media of Europe. Neil Wilson, a senior market analyst at ETX Capital, said

Sterling climbed on a far less hawkish Brexit speech from Theresa May than many had feared. A wolf in sheep’s clothing? Arguably Theresa May’s greatest trick appears to have been to deliver what amounts to a fairly hard Brexit message without the markets going into a flat spin.

Some judicious leaks in the last couple of days were convincing enough to the investors regarding the fact that the British Empire would be leaving the single market. “Many expected a tough-sounding speech that would send the pound lower – that could yet happen as we progress towards invoking Article 50. And the looming Supreme Court judgement still matters a great deal.”

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The then UK PM, David Cameron, resigned after the Brexit results. Theresa May took his place. Photo Courtesy: Business Insider.

It is evident from expert views that this upsurge in the pound relative to the dollar is being perceived as a temporary thing. It is also believed that in the near future, the pound could take a plunge. One can expect these kinds of sensations until the whole process of Brexit and the redefining of Britain’s terms with the rest of the world takes place.


Featured Image Courtesy: Financial Times.
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