Sterling Falls But Who Gains

Oct 4, 2016 Written by LAT Staff

Following Theresa May’s announcement last weekend to trigger Article 50 by March 2017, the pound has resumed its post-Brexit weakness to hit a 31-year low against the US dollar, more than 13% below its pre-Brexit levels. So who exactly is benefitting from this currency depreciation?

To find an answer, you need look no further than the major companies in the FTSE 100 and FTSE 250. There are a number of reasons for this. Firstly, interest rates are expected to remain lower for longer, enabling companies to borrow more cheaply and hence increase profits. Also, UK multinationals are gaining from repatriation of overseas earnings, with the manufacturing and exporting sectors in particular able to provide very competitive pricing while maintaining profit margins. The weak pound, combined with the UK’s technically advanced labour market, has driven fresh demand from overseas, which was duly reflected in yesterday’s strong manufacturing data. Retail sales and consumer confidence have also shrugged off any Brexit concerns (for the time being at least) and are making strong gains, aided by the impact of increased tourism in the UK.

It must be said that the downward trajectory of GBP/USD appears somewhat unrelenting, especially considering the fact that the USD has been relatively weak throughout this post-Brexit period, with the US Federal Reserve having held off any interest rate hikes this year due to concerns over the global economy.

The announcements from the Prime Minister this weekend, together with her apparent refusal to give special consideration to the Financial Sector in the UK, have now driven GBP/USD to new post Brexit lows (currently trading at 1.2750), and a test of the 1.2500 level is now more likely. We know that the market is currently overweight to the short side, which often leads to fast and aggressive pullbacks in prices, but recent history has shown a plentiful supply of sellers to push the pound back down when these opportunities arise.