It took a North Korean ballistic missile launch and Hurricane Harvey’s devastation of the $500 billion Houston/Galveston/Corpus Christi economy to push sterling higher to 1.2950 against the US dollar. While the British pound is the most undervalued G-10 currency on any purchasing power parity or econometric criteria, its upside is limited by deteriorating UK economic data and the clear perception that the EU will exact a draconian divorce settlement before negotiations on trade or post-Brexit UK access to the common market can even begin.
Sterling has benefited from the 9% plunge in the US Dollar Index, disillusionment with Trump’s pro-growth legislative agenda and the falling odds of a Federal Reserve monetary tightening move until December 2017. Political risk and a sluggish economy have both hit psychology on sterling, even though the British currency is now priced for a ‘hard Brexit’ scenario. However, the phenomena of foreign exchange trends overshooting fundamental value zones has been a recurrent trend of post Bretton Woods foreign exchange markets and sterling bear markets have been swift and vicious, as the world learnt the hard way on Black Wednesday 1992. Yet the latest (2007–2017) sterling fall from 2.10 to 1.29 on cable has been the most severe in the financial history of the sceptred isle, worst on a trade weighted index than the ERM exit (1992), the Harold Wilson devaluation (1968) or British Empire’s exit from the gold standard (1931).