Brexit and the Exchange Rate Gamble

25 May 2016

The Bank of England base rate has now stood at 0.5% for over seven years; this is the lowest rate during the entire 300 year existence of the Bank of England. Who would have thought that they would be so low for so long? Certainly not me!

Such a low interest rate offers little support to Sterling which has consequently been fully exposed to the uncertainty generated by the Brexit vote. This has led to depreciation which, in February, hit a seven year low against the dollar before recently recovering some ground. For some of the more adventurous overseas investors, admittedly probably non institutional, this offers the possibility of picking up Sterling denominated assets at a cheap price when calculated in their own currency.

Provided we get a vote to remain in the EU, it is likely that we will see some subsequent strengthening of Sterling even before interest rates start to rise. There can be little doubt that the time for interest rate rises here in the UK is drawing nearer, particularly bearing in mind that the US has already had its first interest rate rise and another is possible before the end of the summer; it seems unlikely that the UK will be far behind and this should lead to a further appreciation in Sterling.

On the other hand if you think that the UK will vote to leave, a gamble on the exchange rate may not be the most prudent option with most analysts expecting this to lead to a further weakening of the currency.

 

Ian Whittock
Chief Investment Officer

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