The pound dropped a cent against the US dollar to $1.4618, which was widely linked to an Office of National Statistics report released the same day showing that UK industrial output growth of 0.1% in February had fallen short of the 0.3% forecast.
However, Khalaf, senior analyst at Hargreaves Lansdown, believes that, while sterling registering its lowest level versus the dollar since the financial crisis can be partly attributed to the ONS data, it has been in the pipeline for a while.
“The weak economic data suggests that there has been some slowing in economic growth for Q1, and may have had an impact,” he said.
“Today’s move is probably UK-centric, resulting from the economic data, but the dollar strengthening has taken us a long way towards the fact that it is a five-year low.”
Khalaf pointed to the divergence of central bank policy as the key influence on the currency market, and says that it is impossible to predict what the future holds for sterling.
“Sterling has fallen against the dollar but is relatively steady against the euro, and that is the world that we are living in at the moment,” he explained. “Currencies are very much determined by the interest rate policies of central banks.
“The dollar is doing so well because the US is expected to be the first country to raise interest rates, and it also explains why the euro has depreciated recently. Sterling is somewhere between those two, and there is no telling which way it will go.”
Another factor in the sterling’s movement is uncertainty surrounding the General Election, which Khalaf believes is about to take hold in earnest.
“It is fair to say that it has been exacerbated by the General Election uncertainty,” he said. “We have not yet seen much in the way of a market reaction to the election, and with one month to go we are starting to see that.
“If we look back at the volatility that we saw around the Scottish referendum, there may be a recurrence of that, and currency traders will be wary of that.”
So how will this translate into the UK equity market, particularly the FTSE 100?
“There will probably be a bit a little bit of a reaction in the markets, initially a positive one,” said Khalaf. “A lot of FTSE 100 earnings come from overseas, so a falling pound augments those earnings in sterling terms.
“The difficulty with having a blanket view is that while sterling has fallen against the dollar, but not against the euro, which is where some of our main trading partners are. On a company-by-company basis it very much depends on where the individual revenues are coming from, so on a broader market level it is difficult to say where that will leave us.”
