The key chart
The key message
I posted a comment on LinkedIn last week about a so-called “basket-case” currency that is currently trading above its five-year average levels despite a host of negative economic, political and market-related factors.
The currency in question was the pound sterling and the graph illustrated the narrow version of the sterling exchange rate index (ERI) as calculated and published daily by the Bank of England (see key chart above).
The “tongue-in-cheek” post reflected an increasing frustration with excessive USD dollar-centricity in current financial and economic reporting.
Trends in bilateral exchange rates such as USD to sterling are important, of course, The US is the UK’s largest individual trading partner after all, and sterling is currently trading 7% below its five-year average versus the USD (see chart above). This is noteworthy in itself.
That said, the UK economy is affected by (and reflected in) movements in sterling against many different currencies. As a bloc, the EU is the UK’s largest trading partner, for example. The region accounts for roughly double the US’s share of UK trade (see chart above). Sterling is currently trading 2% ABOVE is five-year average versus the EURO (see chart below), which helps to explain the trend in sterling’s ERI illustrated above (see key chart).
This is not to deny that sterling is trending weaker, increasing the risk of imported inflation in the process. The sterling ERI has fallen 4% YTD. But, for a UK-audience at least, it is helpful to explore the extent to which reported trends in the bilateral exchange rate with the US are a reflection of USD strength as opposed to sterling weakness.
Perhaps the more important question, is why is sterling actually not trading much weaker than it is now?
Please note that the summary comments and charts above are abstracts from more detailed analysis that is availability separately.