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Pound's unexpected robustness may point to underlying strength

The Guardian logo The Guardian 11/7/2018 Patrick Collinson
A one-pound sterling coin and a one-euro coin. © AFP/Getty Images A one-pound sterling coin and a one-euro coin.

The UK is, President Trump kindly informs us, in turmoil. In Westminster, there is feverish talk of a leadership challenge. The economy is in a state of peak Brexit uncertainty. The trade deficit has worsened yet again. An increasingly bitter trade war is battering Britain’s FTSE-quoted commodity giants.

In the past, sterling, as the barometer of the nation’s international standing, would have collapsed in value in such a crisis. Yet for the last year the pound-euro rate has never been more stable.

On 11 July 2017, the foreign exchange markets gave you precisely €1.13116 for each £1. One year on – on Wednesday at just after 10am – the pound was trading at ... €1.13116. After a year of catastrophic Brexit negotiations and a UK economy that has slowed to a crawl compared to its neighbours, sterling is in exactly the same place.

There was a wobble in August 2017, but since last September, sterling/euro has been held in a virtual straitjacket. It has traded almost constantly in the narrow range of €1.12 and €1.14, exhibiting less volatility than at almost any time over the past decade.

City scribblers have a habit of focusing on the sterling-dollar rate but in truth sterling-euro is more important; most of our trade is in euros, and so is most of our holiday spending. It’s just that multinationals present their results in dollars, and commodity markets price in dollars, so the financial pages follow suit.

Why has the UK’s most important exchange rate stayed so remarkably stable? One view is that currency markets have convinced themselves a hard Brexit is simply not going to happen and that a deal will be thrashed out. Maybe they are comforted by the EU negotiator Michel Barnier’s surprise statement that we’re already 80% there. If so, it would be a rare display of insouciance among FX traders better known for their animal instincts.

Long periods during which sterling is becalmed tend to end like summer heatwaves – with a thunderous tempest before the air clears again.

Last week UBS Wealth Management was so confident that sterling is in the danger zone that it issued a press release to say it was opening a short position on the pound. It reckons that UK economic activity lacks the muscle to trigger a Bank of England rate hike in August, and that the eurozone should bounce back from a soft patch while we sit under a Brexit-related cloud.

Maybe so. But the euro is also weighed down by the vulnerability of German manufacturing exports in a trade war, and the European Central Bank’s continuing quantitative easing programme, which has the effect of depressing the currency.

The unexpected robustness of sterling over the past year amid one political crisis after another may be testament to an underlying strength. On a purchasing power parity basis sterling is probably mildly undervalued against most locations in Europe outside of Spain. It may indeed lurch down if a hard Brexit emerges. But if a deal of some sort is finally signed, prepare for a Brexit bounce in the currency – and a hurried unwinding of short positions.

Ryanair strike

Ryanair’s operations from Stansted are far bigger than those from Dublin, and Italy is now a more important market than Ireland. But Dublin, the airline’s global base, retains a compelling hold over the company – and that is why a “local” strike by Dublin-based pilots on Thursday could be a pivotal moment.

The 24-hour strike won the support of 99% of Dublin-based pilots who voted in a ballot for industrial action. More one-day strikes are planned.

In past disputes, the airline’s buccaneering boss would face down strikers, declaring that most flights would still run on time. And most did. This time it’s different: the airline has chosen to cancel scores of flights in anticipation that the once easily browbeaten pilots really won’t show up.

Slowly, but perceptibly, the balance of power is shifting. Ryanair is likely to be forced into real, and costly, negotiations with unionised employees no longer willing to accept the jolly japery of its chief executive, Michael O’Leary. Will shareholders follow suit? They have a right to feel impatient; Ryanair’s share price has dropped from €18.59 to €15.10 over the past year, a fall of 19%, while easyJet’s has jumped by 12% over the same period.

But while some regard O’Leary as a rascal, many others recognise him as the godfather of cheap travel – and the man who made airlines a properly investable business. He’s still only 57, with no obvious successor.

His big problem is that Ryanair, to get through its severe turbulence, needs to show a bit of humility and emollience, and throw a fair wodge of cash towards its overpressed workers.

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