The pound’s short-lived Boris bounce shows cautious optimism is wiser

The pound’s Boris bounce was short-lived.

Even as the nation dreamed of the heady heights of $1.40 or €1.25, the rise was fizzling out.

Sterling’s climb was knocked on the head when the Prime Minister’s plan to legally rule out an extension of the Brexit transition period was laid out.

At the time of writing the pound now trades at €1.175 and $1.307. That’s roughly in line with early December, rather than the €1.20 and $1.35 hill that the Conservative’s thumping election majority marched it up on Friday morning.

For all the confidence-boosting talk of a Boris bounce for the economy, shares, and the property market, it is the pound that tells the real story.

Sterling’s movement against other major currencies, chiefly the euro and US dollar, reflects confidence in the UK.

It’s the sum total of a huge number of transactions moving money in and out of the pound – effectively the world taking stock of the UK.

What we are seeing is that businesses and investors like the certainty that a government with an 80 seat majority and (in theory) no election due for another five years brings.

However, they also recognise that Britain isn’t out of the woods yet.

If all goes to plan, in six weeks’ time the UK should leave the EU.

Brexit should finally happen by 31 January 2020, but as we all know that’s not the end of it. After that we need to negotiate a trade agreement and other future terms with our partners of 47 years.

You’d like to think this could be done on the basis of common sense and finding mutually beneficial terms. I won’t hold my breath on that.

The bit of Brexit we’ve spent three-and-a-half years arguing about might not even have been the hard bit. 

And while we could extend that transition arrangement beyond 31 December 2020, the government appears keen to go into negotiations looking tough by ruling that out.

You can see why they are doing this, but you can’t help think that after the Article 50 deadline did us no favours, this one might not either.

The pound slipping back shows that is the collective wisdom of the markets. It should be said, however, that markets regularly get things wrong and Boris’s big gambles have paid off so far.

In the meantime, where does that leave us with the stock market, property market and our general finances?

Shares have held onto their Boris bounce, with the FTSE 100 up a shade under 4 per cent and the FTSE 250 up 5 per cent since last Thursday.

Again investors like the dose of certainty the election result brought and the fact that the UK economy won’t be radically overhauled along the line of Jeremy Corbyn and John McDonnell’s socialist ideology (and that’s not media bias, it is what Labour said they would do).

Beaten down UK-focussed companies and sectors seen as vulnerable to a Labour government had most to gain and if the country takes a confidence boost from a new majority government, they could continue to do well.

Nonetheless, some of those sectors, such as housebuilding, banks, utilities and retailers, have plenty of problems they still need to deal with.

Companies with an overseas presence, or trading with Europe, will have wobbles ahead too.

As I sat at my desk and watched my inbox start to fill up just before 6.30am on Friday, the highest initial hopes came from the property industry.

The housing market has been in the doldrums, with dwindling numbers of homes being put up for sale and buyers and sellers finding plenty of reasons to put moves off.

Regional cities and cheaper parts of the country have been a bit more protected from this chill – and first-time buyer numbers have held up well – but nowhere has been immune.

Estate agents are hoping for a rush of prospective buyers in the New Year, but interestingly those I have spoken to seem most keen to get more sellers.

They say that deals have still been getting done, but if a seller faces a dearth of places to move to they have less incentive to be realistic on price and get a move going.

Don’t expect any sudden dramatic improvements in the property market, has been the overwhelming view of the sober realists out there.

The same can be said for savings rates, unfortunately. A rate cut now looks a bit less likely, but there’s a fierce mortgage price war going on and banks and building societies are competing for borrowers not savers. Hopefully, we’ll see an uptick but don’t expect too much.

Overall, 2020 should be less tricky than 2019, but it’s time for cautious optimism rather than the unbridled stuff.