Tuesday 20 June 2017

FX devaluations in UK (and US) over the next few years as a rebalancing tool

We started Brexit negotiation with a decision to go for hard Brexit and questioning the legal basis of any financial settlement demanded by the EU.

EURGBP has never really held above 90p more or less since ERM was set up. So for it to happen now, on a sustained basis, is a clear sign of a weak Sterling based rebalancing framework, which cannot be positive for the EU's own imbalances.

After we get through any near term economic weakness, question is whether the market starts to look for a bit of a wage/ inflation cycle with aggressively negative real rates developing in the US and UK over the next year or two.

Looking back longer term you see the impact on Sterling of the 1970s inflation, using EUR hypothetical and XEU hypothetical exchange rates:

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