A bit of a surprise for sterling


The Observer newspaper summed up the situation perfectly yesterday when it noted that "Investors' ability to take a rosy view of an even deeper Brexit mess is remarkable". Having been right royally tonked in the immediate aftermath of the election sterling has gone pretty well nowhere since then.

The exit polls on Thursday evening prompted a sharp markdown of sterling, leaving it with an overnight net loss averaging -1.2%. It dropped two US cents and one and a quarter euro cents. The logic was clear enough: Strong and stable had apparently swapped ends with a coalition of chaos and Britain's future had become suddenly even more unclear than it already was.

And then, after the pound had touched below €1.13 as London opened on Friday, the attack dogs were called off. Over Friday and the weekend sterling was unchanged, as near as made no difference, against the US, Australian and NZ dollars, the euro, the Swiss franc and the Japanese yen.

Changing the game?

In normal circumstances the advent of a minority government would have sent investors running for cover. It is, after all, usually easier for most of them to sell sterling than to buy it. This time, however, they think the election could have changed the Brexit game, in their opinion for the better.

Their argument goes like this: Theresa May called the election to win a bigger majority that would have enabled her to drive through the "hard" Brexit that she favours; no free movement, no single market, no court of justice, no payments to Brussels. Now with no majority at all, Ms May - or her successor - will have to tone down that hardness for fear of been voted down by parliament.

The assumption then, at least for the moment, is that the British government will have to be more ready to accept compromise in order to remain within the single market. Investors see that as a good thing, hence the suspension of their attack on the pound.

In other news

Thursday's European Central Bank monetary policy statement no longer included the option to take interest rates lower but included no suggestion that it might be preparing to wind down its asset purchase programme. Coming up this week are several other central bank announcements, including the Federal Reserve and the Bank of England.

On Wednesday investors are almost certain that the Fed will deliver a quarter-percentage-point rate increase.  They are less sure what happens after that: the consensus is for another increase in the third quarter but nearly half the economists polled by Reuters think there is now less chance of a third hike this year. The Bank of England is unlikely to make any policy changes on Thursday. 

Except for those who take an interest in Italian industrial output or Portuguese inflation, today's ecostat agenda is a bit of a desert. That does not guarantee a clear run for sterling.