Trade weighted stability for sterling means that it has become constrained within relatively tight ranges against both USD and EUR, suggesting this is a good time for hedgers to act. Loose monetary policy and tight fiscal policy would usually be a recipe for currency weakness. Why is GBP stable?
1. UK policy mix may be appropriate. Loose monetary policy may generate enough growth to allow the fiscal deficit to be cut without a recession, and GBP is supported by this possibility.
2. The dominance of “risk on-risk off” (RORO). The EUR has become the most “risk on” currency and the USD, the most “risk off”. GBP is the major currency which is least affected by RORO, and trades accordingly.
Can stability continue? There seems little prospect that RORO will fade, and evidence that UK policy is working could well keep sterling supported. Stability may last for a while longer, but history shows that it is unlikely to prove permanent, suggesting this is a good time for hedgers to act.
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HSBC Global Research