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What does the rise in sterling mean for your clients' portfolios?

What does the rise in sterling mean for your clients' portfolios?

The relative value of sterling is published daily but remains much less discussed than the rise or fall of house prices or the daily movements of the FTSE 100, yet its impact reaches into far more corners of clients' lives than either of the above.

The unpredictability of currency movement can be seen in the surging value of the pound relative to both the dollar and the Euro, even as the country is gripped by recession and lockdowns, having moved from a low of £1.15 against the dollar to more than £1.40 over the past year. In the wake of the Budget, it dipped slightly to £1.39 against the dollar. 

Josh Mahony, senior analyst at IG Group, says the bulk of the positive momentum is accounted for by the signing of the Brexit trade deal. He says currency markets had priced in a much worse outcome, probably a “no deal” scenario, and as a result, when the deal arrived, the market’s expectations were surpassed, with the result that sterling rose, despite the wider economic uncertainty.

This less-bad-than-expected effect has been amplified by the advent of the pandemic. This is because one of the reasons UK assets were so very out of favour with investors was that before anyone had heard of Covid-19, the UK seemed to be the only stricken economy in the world.

With the advent of the pandemic every economy slipped into the doldrums, leaving the UK as less of an outlier, with UK assets already trading at levels that reflected a disaster; when a crisis came in the form of the pandemic, they had not got as far to fall as others. 

Mahony says the apparent progress of the UK’s vaccine programme relative to that of the eurozone may mean the UK can re-open more quickly, and so grow at a faster pace. 

So the rise in sterling is actually accounted for, says Oliver Blackburn, multi-asset investor at Janus Henderson, by UK bond yields looking relatively more attractive than those of the US right now, while investors are also more optimistic about the prospects for the UK economy with the Brexit cliff-edge removed and the vaccination programme.

He says the market has noticed the Bank of England has retreated from introducing negative interest rates in the UK, while in the US the central bank chief has continued to caution that interest rates will remain very low for a long time. 

This has helped sterling as investors believe it is a sign the UK will recover more quickly than previously expected, while also meaning the dollar is falling in value relative to sterling. 

Borrowing boost

This could mean UK government borrowing falls at a faster pace, or that actions that put a break on a currency, such as very low interest rates or quantitative easing, end more quickly in the UK than in other countries, which would, at least theoretically, mean the pound would gain against the Euro in future.