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The UK’s political vacuum may spark a bigger fall in sterling

First published: The Financial Times, 7/07/2016

The pound’s value prompts the question as to whether it is a blessing or omen

The decline in sterling since the EU referendum to a 31-year low against the dollar, and the 10 per cent drop in its trade-weighted value, has been accompanied by a sharp increase in measures of volatility and by sporadically tighter liquidity conditions.

These make for tougher conditions in the trading rooms of banks and treasury departments but sterling may well drop more, perhaps to at least $1.15. It behoves us to ask whether this is a blessing in disguise or the harbinger of darker times ahead.

We have historical examples of both. When sterling dropped out of the Exchange Rate Mechanism in 1992, its hefty decline from an overvalued level helped to propel economic recovery and an improvement in the balance of payments. Remember, though, that interest rates were slashed, global economic recovery from the 1991-92 recession and the information technology revolution were under way, and China and emerging markets were making their global presence felt….Read more: