Brexit and sterling

The current level of sterling is very close to what the UK Treasury might have anticipated back in June 2016 when the country voted to leave the EU. But that does not mean that it will continue to be correct. Not long before the June 2016 referendum on EU membership, the UK Treasury issued a report on the possible impact on the economy should the electorate vote to leave. It was done as a way to scare the population into voting to stay in the EU, but it clearly failed. However, the Treasury’s conclusions about the pound were eerily correct. The Treasury’s “shock” scenario (of a ‘no’ vote in the referendum) posited that the pound would quickly fall by 12% in trade-weighted terms and, over the subsequent two years, would up a little over 10% below the pre-referendum level. Its “severe shock” scenario put the immediate fall at 15% with a modest recovery to a 12% deficit after two years. The Brexit the UK achieved was more akin to the “shock” scenario and the pound’s movements have been very close to the Treasury’s assumptions. On many other counts the Treasury’s report was way off the mark but, for the pound, at least, it seemed almost prescient.


The upside inflation surprise was mainly driven by processed food, housing, health and furnishing segments. Additionally, the changes in basket weights added around 0.2pp to monthly and annual CPI. Marking to market January’s print and revisiting our assumptions, we raise our year-end 2021 CPI forecast to 10.3% y/y from 9.5% y/y and now see the peak of CPI at 16.0% y/y in April. Against the backdrop of our inflation forecast trajectory and the recent strength in TRY, we still think that the CBRT is likely to keep its policy rate on hold at 17.0% until Q4 21. However, the risks on our policy rate forecasts are to the upside. Additionally, a measured hike of 50-100bp in Q1 21 would make it easier for the CBRT to start regular FX purchases in order to strengthen its reserves.

– Ercan Erguzel, economist, Barclays, Feb 3


One of the big talking points in markets is the sudden resurgence of Bitcoin and the perception of it as a viable asset class. Many proponents of Bitcoin point to the huge liquidity unleashed by central banks to aid the economy and warn that it will eventually cause inflation. It is hard to pinpoint exactly why or when cryptocurrencies gain and lose popularity. Bitcoin sold off alongside most risk assets in March 2020 and initially did not react much to the announcements by central banks of increased quantitative easing. The sudden surge only began in •ctober, with the price rising 282% between 1 October and 8 January. Since its peak, it has lost over 25% of its value without an obvious reason, highlighting both its high risk and erratic performance. Many investors, including some large institutions, are considering adding Bitcoin to their portfolios. It is worth asking why use a cryptocurrency that has no physical presence, over a real asset such as physical commodities, or property. The answer for too many will be its past performance based on speculation.

– Azad Zangana, strategist, Schroders, Feb 1

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