It’s been a rocky week for sterling, as opinion polls suggested that Theresa May’s rationale for holding an election to create strong and certain leadership is not holding up. But look at market expectations of interest rates, and things seem upside down.
In any different era, a weak currency is a sign that interest rates need to rise. Higher interest rates attract money from abroad, pushing up on a currency.
But these days it is not like that. The euro to sterling exchange rate has fallen from 1.19 on May 11th, to 1.144 at the time of writing.
Falls against the dollar have been less marked, but sterling is down.
Yet the markets seem less confident than ever about when interest rates are likely to rise.
Opinion polls seem to be behind the fall in sterling. It is difficult to know what to make of them – let’s face it, opinion polls don’t have the credibility they used to have.
But right now, it seems that anything between a hung parliament and a Tory landslide are possible – a lot depends on how focused support is for each party. Labour’s big problem may be that it is losing support in traditional safe labour seats, where feelings about immigration run strong.
Mr Corbyn talks about it being Labour policy for the UK having the level of immigration that the economy needs, and many voters react in horror.
But as far as the economy is concerned, the reaction of the markets is a tad perverse.
As a rule, they like to see the Tories win, but given that it is the Conservatives who seem to be putting the economy second, behind a desire to cut immigration, it does seem that that economic pros and cons of Tories versus Labour are ambiguous.
The Tories are, however, appealing to Leave voters, and since the voting in the EU referendum had a correlation with median income levels, this does mean that Tory policy does appeal to many natural labour supporters but who are strongly anti the EU.
But what the markets don’t like – as the cliché goes – is uncertainty, and right now the outcome of the UK election seems less certain than it was a few weeks ago.
Mrs May’s decision not to participate in the live leader debate may or may not count against her – it was a calculated risk. But the fact that the debate coincided with the latest semi-final of Britain’s Got Talent may yet save Mrs May. It seems that most of the British public would rather watch a female magician – or is that witch – and kids tell jokes, maybe in the forlorn hope of watching dogs do tricks, than see the UK’s political leaders minus Theresa May and Nicola Sturgeon, argue about immigration.
If you want a summary of the debate, it turns out that UKIP really doesn’t like immigration, if every Green Party representative was as eloquent as Caroline Lucas then it would do a lot better, and Jeremy Corbyn doesn’t seem as awful as some media would have you believe.
But what has also happened in the last few weeks is that the yield on UK government bonds has fallen. On ten year bonds, the yield has dropped from 1.20 per cent at one point in early May, to a fraction less than one per cent for a while yesterday.
The markets seem to be saying that despite the falls in sterling, they do not expect UK interest rates to go up any time soon – whereas earlier this year, there was a view that rates would rise either late this year or early next.
It seems that the UK, for all its Brexit related woes, and election uncertainty, is still seen by the markets as a place of safe refuge.