Last week was a terrible one for UK assets. Goldman’s portfolio strategy team put together this chart depicting quite how terrible it was, showing the quantum of the hit taken by a mix of UK stocks, gilts and currency.
Sure, the chart starts only in 2022, but oooof?
That the sell-off in UK bonds was part of a global bond move doesn’t help the total return of gilt holders. But we’re not here to spill more pixels on bonds. Louis has already done amazing work putting the relative yield moves of gilts — as well as the magnitude of the daily shifts in sterling — into historical context. But we thought it worth updating the FX-curious as to quite how weak the pound has become.
As we’ve written previously, it’s pretty easy to make a currency look weak or strong, depending on the point you’re trying to make. Keen to tell a story of sterling despair in an age of dollar strength? Cable is the answer! Perhaps a tale of sterling resilience during a period of euro weakness? Sterling-euro is your friend.
If you want a more sensible truly cross-rate agnostic measure you could look at the Broad Sterling Effective Exchange Rate series calculated each day by the Bank of England.
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Using this measure we can see how sterling has tracked over the last quarter of a century. We’ve split it by prime ministers, and the big hits taken by sterling from the global financial crisis, the EU referendum, and Liz Truss all stand out. So far, the hit to sterling somewhat breathlessly reported by some of the media is less apparent.
But how many people really know what a broad effective exchange rate even is? Real, non-finance, people that is.
Luckily, as keen readers will recall, our heuristic that sterling’s broad effective exchange rate can be proxied to a 60:40 mix of euros and dollars continues to deliver with stunningly high levels of confidence.
And so we thought it a good moment to revive and update one of our favourite charts, first wheeled out in July 2023, to help answer the question as to how weak or strong sterling is in nice simple terms. The chart that maps sterling’s nominal value against both US dollars and euros, and only really works if you turn it on its side.
As a reminder, sterling moves to either the left or right along the horizontal lines of our rotated chart are manifestations of changes in EUR-USD rather than any strength or weakness of sterling per se.
Sure, this might mean sterling weakening (strengthening) against the US dollar (or euro) while strengthening (weakening) against the euro (or US dollar). But the broad effective exchange rate of sterling will remain pretty much unchanged.
By contrast, the (sort of) vertical lines on the rotated chart show where sterling crosses are for each given level of EUR-USD. Sterling can travel up or down any of these lines without the EUR-USD rate changing a basis point. Such vertical moves show genuine sterling strength (higher) or weakness (lower) in action.
In terms of levels, the latest reading is around 17 per cent weaker than the average rate under Blair, but around 7 per cent stronger than the average under May. It’s 4 per cent stronger than the average under Boris Johnson, and 2 per cent stronger than the average under Rishi Sunak. It would be callous to compare sterling values to those experienced during Truss’s brief tenure (9 per cent stronger).
Of course, if last week’s move (around 1.5 per cent weaker) is just a taste of things to come this will soon not be true. But overall the impact of sterling moves so far look a bit . . . meh?
