GBP: Journey from the ERM to Brexit - SocGen

Kit Juckes, Research Analyst at Societe Generale, explains that today, in real trade weighted terms, sterling is about 15% below the average of the last 25 years and has just bounced off its lowest level, which was about 10% weaker than the level it reached after the pound’s exit from the ERM in September 1992.

Key Quotes

“25 years bookended by the decision to leave the ERM and the fall-out of the decision to leave the EU. In 1992 the UK was creeping out of recession, while Germany was in a post reunification boom. As sterling came under pressure rates were increased to 12% and then a rise was announced to 15%. The decision was taken to leave the ERM before it could be enacted. The UK economy gained speed and eventually, sterling made new highs.”

“In terms of the size of the fall for the pound, neither the 1992 collapse or the 2016 one is as big a fall as we saw in 2008/2009, when the global financial crisis hit, but the basic script is the same. Collapse, consolidation and eventually, recovery.”

“At least in real terms, Sterling has more potential to rally than to fall dramatically further over the next decade or so. And maybe that is why any sterling bear should be wary of weeks like the one we have just seen, with the pound bouncing sharply as the MPC turned hawkish. But with an economy slowing into the decision to leave the EU and rates too low to fall, the only sources of optimism about the outlook for sterling are negative sentiment and depressed levels. Can you build a meaningful rebound on those alone? The recovery after 2008 was choppy and helped by the euro’s weakness in 2010. GBP/USD reached a low in January 1993, but it wasn’t until mid-1996 that the pound really made gains, and the low in GBP/DEM didn’t come until the end of 1995. A protracted period of ‘bumping along the bottom’ during which sterling does make a new low in trade-weighted terms, seems more likely than a turnaround.”