Tuesday 27 September 2016

Volatility to surge while pound dips

Published 04/04/2016 | 02:30

Business owners and managers are being warned to brace for further volatility in the pound, starting with a raft of economic data due this week. Photo: PA
Business owners and managers are being warned to brace for further volatility in the pound, starting with a raft of economic data due this week. Photo: PA

Business owners and managers are being warned to brace for further volatility in the pound, starting with a raft of economic data due this week.

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Reports on activity levels in the UK services sector as well as industrial and manufacturing production will give traders further insight into the extent to which the UK economy is faltering ahead of June's vote on European Union membership.

"Sterling is certainly going to be volatile," said Thu Lan Nguyen of Commerzbank in Frankfurt.

"Sentiment towards the pound is very, very shaky, with the Brexit vote coming closer," she said, referring to a possible British exit from the EU after the June vote.

"I cannot exclude that if the data this week disappoints we will rise even further in euro- sterling."

Sterling fell 1pc to 80.09 pence per euro on Friday after reaching 80.20 pence - the weakest since November 2014 - earlier in the day.

Irish industry is a so-called price-taker when sterling weakens. That means exporters from here, many in traditional sectors such as food and agriculture, have to cut prices or margins when the euro strengthens against the pound.

Sterling has declined about 3.6pc this year, accelerating its drop after the referendum on Britain's membership of the EU was set for June 23, and prominent Conservative party politician Boris Johnson announced his support for the campaign to leave. A gauge of implied volatility in the pound-dollar exchange rate in three months' time, based on options, was near the highest level since 2010.

Sterling has weakened at least 2.7pc against all 16 of its major peers this year amid concern that Britain will vote to leave the world's biggest single market.

Data showed this week that the UK's current-account deficit widened to the biggest percentage of gross-domestic product on record, highlighting the need for investment inflows from overseas.

There is concern from traders that the economic and political uncertainty could deter such investments.

Robust

So far, all of the evidence from here suggests that Irish industry is riding out the current volatility.

Growth in the economy is widely forecast to remain robust this year, despite the Brexit risks.

However, employers group Isme said there is growing evidence that the business environment is becoming less benign, with Brexit fears and currency movements only one factor.

The current political impasse and rising wage demands are also having a major negative effect on business confidence and expectations.

Nine out of 12 indicators that Isme tracks to monitor the sentiment turned negative last month, the group's Mark Fielding said. Economic uncertainty is again the biggest concern for SME owners, he added.

Irish Independent

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