One of the obvious repercussions of the sustained climate of political uncertainty is the dramatic yo-yoing effect it has had on currency markets. With any definitive utterance from Prime Minister Theresa May on triggering Article 50 or driving toward a hard Brexit, you can expect sterling will take a beating.
This week, amid softening discussions around the UK’s relationship with the EU post-split, the pound has surged ahead by 1.53% to €1.19 against the euro, the strongest it has been since mid-September. And many analysts think it could conceivably hit €1.20 in the coming weeks.
Sterling has also recouped some of its losses against the dollar, climbing to its highest level in three weeks on Thursday at $1.26.
While there are still countless question marks around a post-Brexit UK, there are seemingly even more unknowns plaguing the eurozone with the Italian Referendum and several key political elections due to happen over the remainder of 2016 and the first half of the new year.
The unresolved political tension in Europe is one of the main reasons Cavendish Asset Management fund manager Paul Mumford is confident sterling will recover long-term, but he can’t say the same for the euro.
“At some stage sterling will recover,” he said. “It might not be for five years purely because it will take longer for people to realise the UK is probably a better place to be to avoid associated problems you might get in Europe. The southern European economies are pretty poor, they have unemployment problems and their own unique issues, like Italy’s banking crisis. That’s why I would prefer to be holding sterling than euros, to be honest.”
L&G UK Alpha Trust and UK Special Situations Trust manager Richard Penny likewise anticipates a recovery in the pound.
“We do know that the pound is probably undervalued on a trade rated basis so long-term should recover. Part of that recovery will be driven by the politics in Italy and France and stemming from the Brexit agreement, which of course will be a longer-term event.”
