Since the 2016 referendum the value of the pound has been somewhat volatile, reflecting the varying degrees of confidence that investors have had in the currency, given the various potential Brexit outcomes.
After an initial fall from $1.50 to below $1.30 in the aftermath of the referendum, sterling reached a post referendum high of $1.43 in April 2018, when it seemed as though the Bank of England might raise interest rates. In 2019, sterling reached a trough of just below $1.20 in July 2019, following rhetoric from Prime Minister Boris Johnson about the increased likelihood of the UK leaving the EU without a deal. However, the victory of the Conservative party in the UK general election on 12 December 2019 pushed the currency above $1.35, its highest level since May 2018, as a 31 January 2020 Brexit became a certainty.
However, the currency is affected by more than just the Brexit outcome, as demonstrated by the consequences of the global coronavirus pandemic. During the coronavirus-induced market sell-off in March 2020, sterling reached lows of $1.14. This was even lower than the levels reached in the aftermath of the 2016 EU referendum. But as seen in the aftermath of the referendum, sterling has since recovered and reached a high of $1.35 in early December 2020.
Overall, the depreciation of sterling versus most major currencies over the past four-and-a-bit years, has had the effect of increasing the sterling value of assets denominated in other currencies. In addition, any UK companies, which report their earnings in overseas currencies such as the US dollar, will also have benefited from the currency translation back to sterling.
Given that more than 75% of FTSE 100 companies’ earnings are derived from overseas, this is the reason why the FTSE 100 Index tends to rise when sterling falls and vice versa. However, more domestically orientated companies, usually found in the FTSE 250 Index, will tend to struggle when the pound falls as it may cost them more to produce their products/goods because of the increased costs of overseas materials.
A key thing to understand is that a change in sterling can also be attributed to the performance of the currency it is being compared to. For example, the US dollar has experienced bouts of weakness during 2020 that has seen sterling strengthen at various points, despite a lack of domestic UK drivers.
Looking further ahead, while the UK has officially left the European Union there is still the small matter of a trade deal to be worked out before the end of December 2020. With negotiations ongoing, there remains the possibility that sterling will be further buffeted by dramatic headlines as the deadline draws nearer.
Of course, fluctuating currencies are nothing new but it may benefit investors to consider holding a well-diversified portfolio that can adapt to the changing environment and engage with their financial adviser about any concerns they have so that any bumps in the path of sterling should not be a major obstacle on the investors’ journey.