Remember those hazy days at the beginning of March? It was obvious, innit: a hung parliament spells doom to the pound.  Since then, the possibility of a hung parliament has remained just as strong (see Betfair)

and yet the Pound is up.  From the $1.50 level to $1.54.  Nothing spectacular: just enough to confirm my hunch that this is not “tories down, sell the pound’.     The sort of dumb stuff that Tory newspapers were and are desperate to believe.

Although FT Alphaville have every reason to pick on him, it was not just Jim Rogers.  Every saloon bar economist thinks that you can go from 1. not remembering what the UK produces (read Policy Exchange’s recent report on manufacturing) to 2. assuming the pound should fall.

Why is the pound up?  Perhaps the unemployment figures – stronger economy, stronger finances, safer gilts (gilts are also up today).  Perhaps the mildly hawkish BOE minutes. It is not likely to be eurozone strength: they have weaker prices than since the Euro was brought in.    Nor inflation in the US, which is still kinda missing.   Though if the UK is going to outgrow both these it might be good for the pound, it might just as easily translate into even more export weakness, more QE, and the other direction.

Unsurprisingly, though dismayingly for armchair political pundits determined to use their rules of thumb to dictate messages linking the Pound to Political Weakness, I think the direction of sterling is something to do with economics.  I have no idea where it is going, but don’t think it will be much to do with the latest gossip about Liberal Conservative alliances, no matter how well informed.


5 thoughts on “Oh sterling doommongers, where are ye?

  1. I think that no party in Parliament has the remotest intention of even trying getting Britain’s economy up to anything close to the world average growth rate. Does that make me a doomsayers or an incurable optimist?

    1. Neil, you are sui generis, and always will be.

      Personally, I put you in the optimist camp. It is people who think we can’t do anything who are pessimists

      1. Thank you Freethinkingeconomist I am extremely flattered. Being uniquely (or almost so) able to see the facts is, by definition, rare in this world, though I tend to find that, several years later, conventional opinion has moved a short way in my direction.

  2. There is more rubbish spoken about currencies than anything else. Sure noise like political opinion polls can have very short-term effects. However, they are nothing compared to productivity, capital flows and international trade effects. I bet if you looked at a chart of UK productivity with a chart of the effective sterling exchange rate there would be a correlation. What has been falling in the UK? Productivity.

    Moreover, if the Tories are going to fiscally contract faster than the government this should lead to a weakening of sterling. Although markets can irrationally react to noise which they would be doing if they sold sterling down on the back of an opinion poll suggesting a Tory government was less likely. The noise will fade and fundamentals and the trend will eventually prevail. It is worth remembering that GBP/USD X reached its lowest ever point $1.05 and $1.02 intraday 1985, under Mrs T.

    What one never hears with talk of sterling down or up is the fundamental question. Is it fair value, undervalued or overvalued? It is probably just under fair value against the USD, but not by much. Therefore, if it is around fair value those who worry about the current exchange rate need to explain why they want an overvalued currency? Another thing to consider is the Chinese RMB peg. If China revalued the RMB, the USD would obviously depreciate against the RMB. However, the USD would probably appreciate against the EUR and GBP. Until recently a revaluation looked likely and the USD haD been appreciating against the EUR and GBP. Now that China appears to be ruling out revaluation it would not surprise me to see the EUR and GBP appreciating against the USD.

    1. I’m not sure about the productivity. Did UK productivity grow greatly over 1996-2002? I have a feeling it was more to do with a demand for our financial services, growing with a credit bubble That might be productivity of a sort – doing more of the right things – but I doubt the outperformance over others like Germany would have been all about that.

      Also: they cut the deficit, they lower future rates but also the risk premium on sterling stuff. Not sure which way it would go – one reason I never punt on sterling …

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