Very Dark Grey Tuesday

Relentless pressure

The last time sterling fell below US$1.30 was on 5 September 1984, when Black Lace were in the top ten with Agadoo (doo, doo). It had taken the pound 46 weeks to fall from $1.50. Things move more quickly nowadays. This time it took less than a fortnight.

Sterling had another ghastly day on Tuesday. Reports of its demise clearly had not been exaggerated. The pound lost three and a half US cents, two and a quarter euro cents and nearly four yen for a daily loss of -1.8%, on average, against the other dozen most actively-traded currencies. Its cumulative average loss since Referendum Eve now amounts to -11.6%.

There was nothing concrete upon which to hang the blame for the sell-off. The move began as London traders were switching on their screens and proceeded relentlessly through to the early hours of today when, also for no obvious reason, sterling bounced off $1.28 and €1.16. The pound's decline appeared to be sparked by an expectation that Bank of England governor Mark Carney would say something destructive during his presentation of the bank's semi-annual Financial Stability Report. In the event he was indeed pessimistic about the outlook but no more so than could have been expected.

The madness of crowds

By most normal measures (including Purchasing Power Parity) the pound has fallen too far. After the overnight bounce it might be tempting to buy it in the hope that the worst is over. Whilst that could, in time, turn out to have been the correct decision it is by no means the safest.

By the PPP measure, which compares the cost of something in one country with the price of an identical item in another, Cable should be around US$1.42. It is therefore theoretically undervalued by more than ten cents. But what is going on here has nothing to do with economics or logic: It is driven by sentiment - hopes and fears - and there are rather more of the latter in circulation.

Even though investors should by now have priced into sterling slower growth, lower rates, renewed quantitative easing and prolonged political discord that does not mean they cannot mark it down further. Moves such as these are invariably overdone and this one could well have further to go. It will be another two months until Britain gets a functioning prime minister and it is hard to imagine a meaningful rebound before then.

A correction, maybe

An inconsequential rebound is not out of the question though after sterling recoiled from a downward spike just after three o'clock this morning. There are no UK ecostats to get in the way and Mr Carney will be busy helping the chancellor with his sandbags.

When the European Central Bank president addresses the ECB Statistics conference in Frankfurt this morning it would be reasonable for him to mention Brexit. However, there is little that Mario Draghi could say to inflame a situation that is already beyond incandescent.