The trend for exchange rates to be driven more by political events than any underlying economic factors has been to the fore once again in recent days, as events in the UK and the US have impacted upon the strength of the pound against the dollar. It probably doesn’t need pointing out once more, but the most obvious example of a political event affecting the strength of the pound has been the Brexit vote of 2016.
The shock result led to sterling immediately plummeting against the dollar to a position from which it has yet to stage any meaningful recovery. Over the months since, however, there have been a few events which have pushed sterling higher, such as the court decision which prompted a Parliamentary vote on the triggering of Article 50.
This last is a good example of the relatively febrile state of the markets, and of the fact that events which are deemed to be hugely significant when they occur turn out, in the longer term, not to have the impact which many were expecting. The Commons vote on Article 50 was heralded by some, for example, as a chance to exert influence on the government approach to Brexit negotiations if not to slow the process down altogether.
In the event, a three line whip from the Labour party saw Article 50 legislation ushered through the Commons, presenting the government with what amounts to pretty much a blank cheque when it came to negotiating the terms of Brexit. Thus, when the longer term history of the Brexit process comes to be written, the legal decision to force a vote on Article 50 will be a footnote, if that.
It’s doubtful that the same will apply to Theresa May’s decision to call a snap general election on June 8th. The fact that the result of the general election – an increased Tory majority – is being pretty much taken for granted has led to a somewhat counter intuitive response to May’s announcement. The currency markets tend to respond negatively to uncertainty (hence the Brexit fuelled slump in sterling), and a general election campaign would, in normal circumstances, be regarded as heralding a period of disruption.
This particular campaign, however, is being regarded as a process which will inevitably lead to a strengthening of May’s hand and of the Brexit line which she wishes to pursue. The sense that, from June 9th onward, an entrenched government will be able to proceed with Brexit on the terms chosen by Prime Minister May led to sterling rising 2.7% against the dollar on the day the announcement was made, to hit a six month high.
Doubtless one of the reasons for the relative optimism driving this movement was a sense that a government working to manifesto commitments on Brexit (such as a promise to leave the single market) would be in a much stronger position, constitutionally speaking, to face down opposition from the House of Lords. Another positive aspect was that a general election in 2017 removes the threat of having to hold one in 2020 at the same time as attempting the Herculean of finalising the Article 50 negotiations.
Of course, a strong pound can only ever be analysed in the light of the position of other currencies such as the dollar, and here, once again, political events have had a marked impact. We’ve seen this over the course of history and the last three months have just emphasised what world events can do to the markets.
To say that President Trump’s first 100 days in office have been eventful is probably one of the understatements of the decade, but it is Trump’s recent excursions into military action which have done the most to weaken the dollar. Perversely, the decision to bomb Syria following the use of chemical weapons was generally regarded as having a positive impact upon Trump’s political fortunes, pleasing some of the liberals who had been the most strongly anti-Trump at the same time as dismaying some of his staunchest supporters, disappointed by what was regarded as a betrayal of his anti-interventionist rhetoric.
It was the more hard-line noises coming out of the administration regarding North Korea which did most to weaken the dollar, however, as fears rose that the promise to ‘do something’ about the increasingly bellicose communist republic, with or without the co-operation of China, could lead to a break down in relations between the US and China, and with it a threat to the bi-lateral trade deal which, in 2016, had been worth trillions of dollars.
Taken together, these events demonstrate the degree to which currency fluctuations are now in thrall to political machinations and, perhaps even more importantly, the ways in which these machinations are interpreted.
The unforeseen events of the last couple of years have created an atmosphere in which fluctuations occur at the earliest possible stage of the news cycle, when a policy or decision is announced rather than when the ramifications of that decision have begun to emerge. What this means is that anyone hoping to work with these fluctuations is going to have to develop the keenest possible political antenna.