GBP/USD Update

by Alexander Beard, on Feb 26, 2016 6:42:29 AM

Despite sterling strengthening over the first half of 2015, the Pound has fallen over the last year and a half - GBP:USD stood at $1.72 in July 2014, compared to $1.39 today. What have been the main drivers?  On the UK side - a Scottish referendum that was too close for comfort, a UK General Election that caused uncertainty in the build-up, the slowing of the economic cycle into the end of last year, a big oil-driven drop in inflation that has seen the Bank of England turn a lot more dovish and market expectations for the first rate rise pushed out to early 2019.

Furthermore there’s the In/Out EU Referendum that is now set for 23rd June- seeing downside risks covered in case of a Brexit. At the same time, the US Dollar has been strengthening (not just against the Pound). The US Federal Reserve have more than just an inflation target like the Bank of England do. They also have a legal mandate for targeting ‘full employment’ as well. The US labour market has reached its long run equilibrium according to the Fed, while core inflation has been picking up, stripping out that oil price drop. So the Federal Reserve tapered and then ended their QE program in 2014, and at the end of last year raised interest rates for the first time in almost a decade. This triggered plenty of inflows into the greenback – at a time when concerns over Chinese growth saw plenty of safe haven money also move to the US (traditional currency havens such as Switzerland and Japan have seen a fight back from their central banks).

A  lot of drivers indeed. So where does that put GBP:USD? Trading at 7 year lows, levels last seen after the collapse of Lehman Brothers in 2008/09. The world is wondering where we go next. A lot will depend on the outcome of the EU Referendum. The risks until that date are very clearly skewed to further weakness in the pair. Polls are mixed, commentators split. Businesses are unlikely to invest heavily at a time of potential uncertainty, that will perhaps drag on GDP. International investors might be concerned and pull money from UK investments, the access point for China and the US into the single market in Europe is at risk. From June 23rd onwards? One could flip a coin. Heads we stay, Tails we leave. It’s likely a 1.30 – 1.50 spread on the outcome assuming we go into it from a reasonable place. The US recovery will play a part after the dust settles, the willingness for the Fed to continue tightening policy at a time when the rest of the world is easing in search of inflation and growth. But one thing is for certain – the next few months could see some sustained Sterling weakness.”

How does this affect my SIPP transfers

As mentioned sterling has weakened by around 12% since June 2015, bringing us to a 7 year low against the US Dollar. Naturally this has an adverse effect on clients wishing to move funds from GBP into US Dollars within their SIPP, where each £100,000 transferred will now buy you $19,000 less than last summer. However, this GBP weakness has been positive for clients who already hold US Dollars and now wish to transfer this back to Sterling (GBP); Every $100,000 transferred into GBP will achieve £8,500 more than it would have last summer.

Commentary provided by our chosen currency provider, Investec Bank Plc. Please click here for disclaimer.