For the world’s most-accurate predictor of the British pound, it all started with the wake-up call of Brexit.
Pound forecasters at Washington-based Monex USA Corp. were the top-scoring in Bloomberg’s second-quarter accuracy ranking. To them, the bet comes down to the ability of the nation’s leadership to ensure stability in the wake of the UK’s exit from the European Union, the pandemic and high global interest rates.
“The Brexit situation is really what woke us all up about the geopolitical changes that were happening,” Juan Perez, director of trading at Monex, said in an interview. “Ultimately, we feel currencies are a way to measure a country’s management abilities.”
The pound is still among the year’s best Group-of-10 currency performers against the US dollar, lagging only the Swiss franc. While it remains more than 2% weaker than it was when the UK officially left the EU, the currency has been supported by the Bank of England’s aggressive monetary tightening campaign. The pound is up more than 6% this year to $1.285.
That’s an area where Monex expects the currency to linger as the nation faces a key test with economic growth and inflation. Perez, along with the firm’s Vice President of Dealing and Trading John Doyle and trader Helen Given, see the pound hovering around $1.28 through the end of the year, and reaching $1.29 early next.
For Given, those forecasts reflect the team’s conversations with clients, which offer insight on both short- and long-term currency risks.
The discussions “show us what actually matters,” she said, and offers context on whether shifting exchange rates are “an outside swing on a day or an actual repricing.”
Britain’s inflation rate dropped to the lowest in 15 months, fueling hopes among some investors and economists of a shift away from the worst price spiral in the Group-of-Seven nations. The data also offered some relief for BOE Governor Andrew Bailey and Prime Minister Rishi Sunak, who’ve been feeling the heat from the struggle to get a grip of the worst cost-living crisis in generations.
The ebb of inflationary pressures also potentially eases pressure on homeowners after a sharp surge in mortgage rates that threatened to be politically damaging for Sunak. Britain, of course, has seen a string of recent leaders — from Boris Johnson to Liz Truss — that raises the stakes for Sunak’s governance.
Sunak’s government remains under pressure as voters demand improvements in strained services, such as in healthcare, at a time when the public finances are already stretched. To Monex’s Perez, it’s clear the government should funnel spending toward sparking growth in various industries and making them less reliant on the US.
If the prime minister “can spark a return to closer relations with EU partners, perhaps some of the pressures will ease off for UK,” he said. Sunak “can only do so much without spending more and things are looking rougher on the political front. It is really worth a reconsideration of where they stand post-Brexit.”
