It was a brave trader betting on sterling at the start of the year. Economists were fearful for the British economy as 2016’s dramatic fall in the pound fed through to surging inflation; Theresa May was still a novice as Prime Minister; and the Brexit process had not yet truly begun.
Brexit has – as might have been predicted – been the story of the year. “Every Brexit headline has had the potential to move the pound,” says Lee Hardman, currency analyst at Japanese bank MUFG.
However, those expecting a major blow-up will have been relieved to find that sterling approaches the end of the year on the verge of a relatively impressive performance: up by almost nine per cent against the US dollar, and flat on a trade-weighted basis even as the euro has surged.
1: January drama
At the start of the year the year sterling was in the doldrums, having barely recovered from a record low in October 2016, according to the sterling exchange rate index compiled by the Bank of England. Expectations of spending from US President Donald Trump had buoyed the dollar, while investors balked at the lack of clarity from the government on Brexit.
Much needed clarity was delivered by Theresa May in mid-January, amid big swings in volatility. At a speech at London’s Lancaster House, May confirmed the UK will aim to leave the Single Market. Markets breathed a sigh of relief, sending the pound to its biggest one-day rise of the year on 17 January – even if a so-called soft Brexit was seemingly ruled out.
2: Article 50 trigger warning
In March the Prime Minister threw more red meat to pro-Brexit backbenchers – fearful the UK might retreat from the lines drawn at Lancaster House – with the announcement she would trigger Article 50 on 29 March.
Yet while the political process of Brexit dominated the foreground, the big economic change wrought by the vote’s sterling fallout had already started to be felt early in the year. Inflation rose above the Bank of England’s two per cent target for the first time since 2013 in March, adding to sterling strength as the dollar weakened.
3: Snap election shock
In a year of high drama there was little to match the morning of 18 April: a mysterious lectern outside 10 Downing Street, a frenzy of speculation around a statement, and then a snap election announcement.
Opinion polls uniformly predicted a strong majority for Theresa May’s Conservatives. Some people thought it would strengthen the hand of Brexit supporters, while others reduced their risk of a harder Brexit deal. However, in the interpretative free-for-all almost all traders were agreed: the snap election decision meant sterling was worth a lot more.
4: Election Mayday
Everyone was wrong: Labour leader Jeremy Corbyn, whose campaign was inspired where May’s was insipid, caused a sensational shock even by the standards of the last two years, depriving the Prime Minister of her majority, and with it her authority.
Sterling suffered its worst one-day fall of the year on 9 June as investors waited for the imminent collapse of the Tory government.
5: Enter Carney and the hawks
During a sleepy summer in which the Brexit process stalled doves on the Bank of England’s rate-setting monetary policy committee. That “caused a lot of people to reappraise where the BoE were seeing inflation,” says Jeremy Cook, chief economist at World First, the payments firm.
In September governor Mark Carney added his rhetorical weight, preparing markets for a reversal of the post-Brexit-vote interest rate cut. The comments sent the pound soaring, as the Bank moved to battle what it saw as inflationary pressure, even as its growth outlook remained weak.
Yet when the rate rise finally came, on the 2 November 2017, investors were less impressed, selling the pound as they scaled back their bets on the future path of interest rate rises as Carney and co. failed to send a hawkish signal.
6: Towards sufficient progress
Once the Bank of England had finally fired the starting gun on what it sees as a hiking cycle, the focus in the last two months came back onto Brexit, with the calls for the UK and EU to achieve “sufficient progress” and agree a transition deal by the end of the year.
The first part was achieved – in spite of almost falling through over a dispute about the Irish border. Yet businesses, investors and citizens still await news of a transition period, details of which could prove to be the next big political event for sterling traders.
Some 18 months after the EU referendum the negotiations still dominate, with little sign of investors’ fixation on Brexit waning.