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What next for sterling?

27 August 2019

4 minute read

Sterling has had a bumpy ride in recent months, not helped by political uncertainty around Brexit. We assess the outlook for the pound.

Who's this for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • What impact the uncertainly around Brexit had on sterling.
  • Which factors other than politics affect the pound.
  • What currency movements mean for investors.

The pound plummeted to below $1.21 in August for the first time since January 2017, amid concerns that the UK might leave the European Union without a Brexit deal.1

Continuing political uncertainty has weighed heavily on sterling in recent months, and there are concerns that a disorderly no deal Brexit could result in further losses. Prime Minister Boris Johnson has said that the UK will leave the EU on 31 October with or without a deal.

If a deal is agreed, it’s possible that some stability could return to the pound, although there are no guarantees that this will happen.

The FTSE 100 index of Britain’s biggest companies has held relatively steady amid sterling weakness as many of the multinational companies listed on the FTSE 100 index earn much of their revenues overseas. When the pound falls, this boosts their foreign profits when they are converted back into sterling.

Where next for the pound?

No-one knows for certain which direction sterling will move next, but investors should prepare for continuing volatility amid ongoing Brext uncertainty.

It’s important to remember that politics isn’t the only factor which impacts on currency movements. Inflation also plays an important role in the value of the pound, with rising living costs putting further downward pressure on the currency.

The UK’s CPI inflation rate reached 2.1% in July 2019, above the Bank of England’s 2.0% inflation target, with predictions it will be higher in two and three years' time.2

If we leave the EU with no deal, inflation could rise more sharply. Ordinarily, this would make an interest rate increase more likely as higher interest rates can help curb inflation. However, there is a growing school of thought that interest rate cuts could be on the cards in the event of a no-deal Brexit.

Recent data has revealed weakening economic growth here in the UK and the economic situation could worsen, in the short term at least, in the event of a no-deal Brexit. Therefore, rather than focusing on controlling inflation, the Bank of England may prioritise stabilising growth. One and one way of doing that is to reduce interest rates as it cuts the cost of servicing debt which can, in turn, help encourage businesses to invest.

However, if Brexit negotiations are successful and we leave the EU with a deal, sterling could strengthen. A contributing factor to the currency’s recent weakness has been all the negative news about the impact no-deal could have on UK businesses and the economy if a deal removes some of this uncertainty, sterling may rally.

How do you prepare when the road ahead remains unclear?

At the moment, the only thing that seems certain is that we don't know what lies ahead.

This means that investors may want to consider spreading their risk internationally, rather than focusing solely on the UK.

Adopting a global approach means you can not only benefit from a much broader range of companies to invest in, but also that if sterling weakness continues, any income and gains will be worth more when translated from dollars or euros into pounds.

If there is a pick-up in sterling’s value going forward while it would reduce the value of existing international investments, if you invested new money, it would go further when converted into the foreign currency and potentially buy you more units. This does, of course, depend on the listed price of foreign shares in their original currency.

It’s important to remember that even if currency movements benefit you, any gains made could be offset if the listed price of your foreign stock falls.

If you are considering investing globally, you must be prepared to accept the risks involved, and that you could get back less than you put in. For investors seeking income, global income funds that search for yields overseas include the Janus Henderson Global Equity Income fund and Jupiter Ecology fund, but there are plenty of other options available. Funds for investors wanting growth rather than income include Janus Henderson’s Global Sustainable Equity fund, which invests in global companies whose products and services are considered to contribute to positive environmental or social change.

Remember that our referring to these funds does not constitute advice or a personal recommendation to invest in these or any other investment. If you’re unsure where to invest, seek professional financial advice.

Please bear in mind that investments can fall as well as rise and you may get back a less than you invested.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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