Few expected Donald Trump to sweep to the US presidency, and few expected sterling to be one of the immediate beneficiaries.
Pound rebounds
Yet sterling enjoyed a dramatic and unexpected ‘Trump boost’, surging in the wake of the shock election result, as investors suddenly started to treat the UK has a safe haven. After talk of the pound hitting parity with the dollar, it was suddenly trading at a more respectable $1.26. It is now up more than 5% against the euro, currently trading at around €1.16, a big leap from the lows around €1.10.
While it is good news that the precipitous post-Brexit vote drop in the pound had been halted, the consequent impact on the FTSE 100 has been a concern. The benchmark of top UK companies has held up well since Brexit, as the crashing value of the pound has pumped up the value of overseas earnings once they’re converted back into sterling. For investors, this has been a surprise bright spot of the referendum, and should soon start showing up in company results.
Dollar relief
Yet the Trump boost can be overstated. The pound has given back some of its gains against the dollar, and now trades at just below $1.24. This should spell good news for big dollar earning and dollar dividend-paying companies, which should continue to enjoy positive currency tailwinds. As investor panic subsides over how crazy Trump will be in practice, the dollar has enjoyed a relief rally.
It may rally even further if the US Federal Reserve hikes interest rates by 25 basis points in December, as seems increasingly likely. Top US central banker Eric Rosengren has just said that forecasts of a hike in December seemed likely to be correct, barring unexpected shocks. The prospect of Trump greenlighting $1trn of stimulus should grant Fed hawks the opportunity they are waiting for. With unemployment in the US now down to just 5%, his package of measures could prove inflationary. The dollar could strengthen further.
Euro woe
I am less convinced about the euro. Next year will see a string of key elections across the Eurozone, including in France, Italy and Germany, and the populists are on the march. Analysts may be writing off the chances of Front National leader Marine Le Pen winning in France, but they also wrote off Brexit and Trump. Le Pen is running on anti-EU, anti-globalisation, anti-free trade and anti-elite ticket ticket, and a victory would shake EU, as she has also promised a “Frexit” referendum. With key elections in Germany and Italy as well, the euro could be in for a troubled 2017.
The problem is that sterling is also likely to hit further difficulties. The pound’s recent recovery isn’t just down to Trump, but the three High Court judges who said Parliament must be given a voice over Brexit. If the government’s appeal against the ruling is successful in early December, the pound could plunge. It is likely to plunge again once we finally trigger Article 50, especially if Theresa May still hasn’t worked out our negotiating position.
The pound’s recent rebound is unlikely to dent the attraction of UK-listed companies with large overseas earnings (especially those that pay dividends in dollars), for the simple reason that it seems highly unlikely to last.