A quiet but significant change

[Suff]

Completely swamped by the leadership election going on.

In the last few days the exchange rates for $, £ and € have diverged. For decades now the £ has been orbiting the € and moving against the $ based upon its relative value to the €.

This week that broke and cable (the traders name for $/£ trades), broke out into a new 1:1 relationship. The £, like many currencies, is falling against the USD. But it is climbing against the € at the same time as the € is falling against the dollar. The three currencies now have an independent relationship.

The £ is holding its own against the $ because of the interest rate differential. Currently the $ is at 1.5% to 1.75%. The £ is at 1.25% and the Euro is between -0.5% and 0.25%. This Huge differential, which will become bigger over the next year, is driving currency rates and the departure of the UK from the Euro levels of strict control and small moves is breaking away the £ from the €. Especially if, as is expected, the BOE raise rates by 0.5% in August.

The US is expected to end up with a rate of 3.4% by the end of 2023. The UK will be around 2.5% and the Euro will likely be at 1% to 1.5%.

This massive differential is likely to completely sever cable trades from € trades and when this current situation of high inflation, economic trouble and high national debt, is finally resolved, I can't see any way the old regime will return.

If this is true we could be on a path to €1.5 or €1.6 to the £ in the next decade. It will change our trading relationship with the EU more than Brexit did because it will drive costs significantly higher.