British Pound Like an Emerging Market Currency, says Mark Carney

Political uncertainty has ramped up sterling volatility, says Bank of England Governor

James Gard 11 September, 2019 | 11:16AM
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Mary Carney

Bank of England Governor Mark Carney says that sterling’s recent volatility means it is behaving more like an emerging market currency than one of a leading global economy. 

The pound has swung dramatically against the euro and dollar in recent months, particularly in reaction to political events such as the appointment of Prime Minister, Boris Johnson and the suspension of Parliament.

In a speech in the US, Carney said the pound had “decoupled” from other advanced currencies because of Brexit uncertainty. He expects a substantial move in financial markets when the Brexit outcome is finally decided.

From a level of €1.176 in March, the pound fell to €1.064 in August, only to bounce back to €1.11 in recent days. Against the dollar, the swings have been of a similar magnitude. March saw a GBP-USD rate of £1 to $1.33, but in August the pound had slumped to $1.19 amid Brexit anxiety. Financial markets have also seen a “flight to safety” towards currencies like the dollar and yen that has harmed sterling’s prospects.

Rathbone’s chief investment officer Julian Chillingworth says of this summer’s moves: “The closer we get to the departure deadline, the flightier sterling markets get. Having a gung-ho Prime Minister leading a hard-line Brexit Cabinet has given currency traders a perfect excuse to avoid the UK.”

Brexit Warnings

The Bank of England has made a number of warnings of the disruption that a no-deal Brexit would cause to the wider economy and the currency, stock and bond markets. But the Bank has recently adjusted its forecast for the impact on the UK economy upwards - a no-deal Brexit would reduce GDP by 5.5%, the Bank estimates, rather than the 8% originally forecast.

Carney’s comments come ahead of a busy period for central banks. The European Central Bank meets this week, the Federal Reserve is expected to cut interest rates next Wednesday and the Bank of England meets on Thursday, September 19.

The ECB is poised to restart its quantitative easing programme, but the Bank of England is not expected to move rates lower before Britain leaves the EU on October 31 – its next meeting after next week’s is on November 7, after the Brexit date.

While the market consensus is that the Fed will continue reversing 2018’s four rate cuts – with similar moves expected from the Bank of England and ECB. Bond yields have recently inverted in the US and UK, which suggests that investors expect longer-term interest rates to be lower than they are now. Bond markets could be signalling economic recession so investors are fleeing to safe assets - for example, highly prized 30-yearGerman bondss are offering a negative yield, which means that investors are willing to lose moneyin exchange for the relative safety of bunds.

But investors should be wary of thinking that the path of interest rates is predictable.

“The current underlying run rate of the US economy likely means that should a trade truce occur – which could happen at any moment – lower interest rates may not be appropriate,” says Maya Bhandari, multi-asset portfolio manager at Columbia Threadneedle.



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James Gard

James Gard  is senior editor for


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