While Richard Lawrence is worried about the longer-term effect Brexit will have on the U.K. economy, the British pound has been “remarkably resilient” throughout the turmoil.
“The pound was higher in 2018 and then started to weaken as the [Brexit] negotiations dragged on,” said Lawrence, senior vice-president, portfolio management at Brandywine Global Investment Management in Philadelphia, Pa. “But, I would say, relative to what you might expect in terms of a negative sentiment on the currency, it’s remained remarkably resilient.”
This has been the case despite factors like business investment as a share of growth in the U.K. going from “a strong positive to now a negative,” he said in a May 10 interview. “You’re seeing businesses reduce the amount of investment they’re making in the U.K. We’re seeing jobs leave London to go to other financial centres in Europe.”
Longer term, these factors could create a headwind for the sterling and favour the euro, said Lawrence, whose firm manages the Renaissance Global Bond Private Pool.
For now, the market is focused on the new Oct. 31 deadline for Brexit, he said. Until then, he expects “currencies to be still somewhat range-bound,” meaning that both the pound and euro will trade within a tight range.
The pound has traded between US$1.25 and $1.35 for the past year, moving back down to the lower end of that range in late May, following the collapse of outgoing Prime Minister Theresa May’s fourth Brexit plan.
The euro has weakened over the past year, from the US$1.18 range a year ago to US$1.13 this month.
“The euro has effectively traded in about a 3% range. And it’s not been a dissimilar story for the pound,” Lawrence said.
More on the euro
Brexit isn’t the only factor impacting the euro. “When you think about how weak the data has been in Europe, you would imagine that the euro would be trading far lower,” Lawrence said.
China is one of Europe’s largest trading partners. As China’s economy picks up and benefits from government stimulus, he said, it will boost the eurozone economy and the euro.
“We think that’s what’s getting reflected in the resilience that we’ve seen in the euro,” he said.
China’s economy grew 6.4% in March 2019. However, Lawrence was speaking before trade tension between China and the U.S. flared up again last month.
Europe’s economy grew by 0.5% in Q1 2019. Inflation has slowed this year to 1.7% in April, close to the European Central Bank’s 2% target. An Organization for Economic Co-operation and Development report from May forecast Euro Zone growth below 1.5% this year due to policy uncertainty and trade tensions.
“We’re in the green shoots phase,” Lawrence said of the European economy. “Things are just sort of bottoming out. They haven’t really turned yet. But one of the surprises in the global growth distribution story, later in 2019, might be the rebound we’re probably going to see in European data.”
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.