The pound has been on an especially dramatic rollercoaster ride over the past week. Already on a roll, Thursday’s news that Prime Minister Boris Johnson had brokered a Brexit deal, sent it shooting straight to a five-month high; to within a whisker of $1.30.
But, while the fact that the pound rallied so strongly when negotiators announced they had sealed a new deal to take the UK out of the EU, was, on the face of it, positive, what it also tells us is that the pound is nowhere near the end of the line yet when it comes to this ride.
We saw that all too clearly when that particular high proved to be short-lived. News that the Democratic Unionist party (DUP) was declining to support the new agreement, leaving Boris Johnson’s government facing an uphill battle to persuade parliament to back it in a vote scheduled for Saturday, saw it fall back down to $1.28.
It still means that sterling has rallied more than 5% over the past week, but it also means that the volatility that has become a hallmark of the pound ever since the EU referendum vote back in June 2016, is far from over.
On the plus-side, a no deal Brexit, which is the most feared scenario, looks less likely now than it has at any other time in the past few months; if not years. As a result, the pound is continuing its gains today, ahead of crunch day tomorrow. We will now have to wait and see what Saturday’s outcome and the markets’ responses are to it on Monday.
The pound has reacted to every twist and turn - and it continues to do so. Leaving currency traders, investors and companies with no option but to buckle up and go along for the ride.
And the gyrations in the currency markets have been echoed throughout other assets. The prices of UK government bonds, which are seen as a traditional safe-haven in times of turmoil, fell sharply on the news of the deal, only to rise again; embarking on a mini rollercoaster ride of their own
Ten-year bond yields, which rise as prices fall, climbed to a three-month high of 0.793%, before slipping back to 0.689%.
Meanwhile, the ups and downs of the pound have also been played out in the stock market. The FTSE 100 index of leading shares rallied slightly on news of the deal, chiefly propelled by support for the UK’s banks and housebuilders, who are seen as something of a barometer of Brexit risk. And Berkeley Group, Taylor Wimpey and Persimmon continue to lead the FTSE 100 risers today as they, and the UK’s banks are seen as potential beneficiaries of a Brexit deal.
But there’s also a distinct downside in the market, to the pound’s rally. It is in fact bad news for the majority of the FTSE 100’s constituents; a host of largely multi-national operators for whom a weak pound is a fillip.
For the positive effect of sterling’s rise we have to look at the more domestic-focused FTSE 250 index, which has risen about 6% over the past week.
Brexit may have been initially at least, primarily a UK issue, but in a global economy the collateral impact is plain for all to see.
Stomach-churning it may be, but we are far from the end of the ride. For investors, staying firmly grounded is tricky, but by keeping your options open and your investments diversified, you have the best chance of not only riding it out in style, but benefitting from it too.
After all, one day Brexit will be history, but stay invested, remain diversified and keep abreast of the twists and turns and you could very well have a positive tale to tell.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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