Sharp swings in sterling are a sign of things to come

There has been a lot of talk about Irish exporters having to deal with sterling weakness. But another – related – factor is in play too. Volatility. This, more than anything, may be a sign of things to come and will make planning really difficult for businesses.

Today’s trading is just one example. Sterling opened at just under 90.3p. It then rallied by more than 0.8 per cent against the euro driven by a couple of factors. In late trading it was around 89.2p to the euro.

The first thing supporting sterling was clear signs of a pick-up in UK inflation, which dampened expectations of another cut in Bank of England interest rates this year. While the annual rise of 1 per cent is still well below the Bank of England’s two per cent target, forecasters believe that the 20 per cent drop in sterling since the Brexit vote will push inflation sharply higher in the coming months.

Deals

However, the second factor supporting sterling today was political. UK government lawyer James Eadie, representing the Conservative government in a High Court challenge over who has the right to trigger divorce talks with the European Union, sent the pound briefly to $1.23 by saying parliament would “very likely” have to ratify any Brexit deal with the EU.

This shows that investors are still desperately trying to work out, like the rest of us, how this will all work out. With many British MPs seen as having doubts about the hard Brexit option – where Britain also leaves the single market – there is speculation that parliament could push Theresa May’s government to take a somewhat softer line.

Option

Who knows, of course, how this will pan out. But one thing to watch is that since May was seen to favour the harder option during the recent Conservative party conference, sterling has dropped by about 7 per cent. Perhaps the economic cost becoming evident via higher inflation – and the associate hit to living standards – in the months ahead will affect the political dynamic.

In fact, some UK commentators have identified the threat of big falls in sterling and the impact on the UK public as the real constraint on May’s government as the talks approach.

With a lot of uncertainty about Britain’s approach to negotiations likely in the run-up to the formal triggering of article 50 next spring – and quite possibly thereafter – volatility on financial markets looks like a dead cert. And sterling will be in the front line.