If you've been looking at the British pound's rate versus the dollar lately, you'd almost think that all the Brexit uncertainty has been erased: sterling has appreciated around 12% versus the greenback in one year.
The British currency traded at $1.3828 early on Thursday according to Bloomberg -- the highest since June 24, 2016, the day when the stunning result of the European Union referendum was announced.
But this is mostly due to the U.S. dollar's general weakness. Versus the euro, the pound has depreciated by around 2% in one year -- and it is hard to say this is the end. The collapse of a big infrastructure company that did a lot of government work could put pressure on the currency.
The good news for the pound is that inflation was as expected in December, even though still on the high side. Consumer price inflation, which is the index that the Bank of England watches when it decides on monetary policy, fell to 3.0% from 3.1%. That is still a full percentage point above the central bank's target, but it is reassuring that it has not spiked up further.
Brexit negotiations are the main political factor that could influence the currency's exchange rate, and it is hard to say how they are going. Earlier this week, the EU love-bombed the U.K. again. European Council President Donald Tusk said, "We haven't had a change of heart. Our hearts are still open for you."
European Commission President Jean-Claude Juncker reinforced that message, offering the way back for the U.K.: "Once the British have left under Article 50 there is still Article 49 which allows a return to membership and I would like that," he said in the European Parliament. "I would like us now to treat each other with respect and not abandon each other."
The British, or at least those officials firmly in the Leave camp, were not especially impressed. Environment Secretary Michael Gove, a staunch Leave supporter who had been in the running for the Prime Minister job in 2016, said: "We have a great future outside the European Union and we should be embracing that."
There has been talk in some quarters of the possibility of organizing a second referendum on the issue of Brexit, which the government has flatly rejected. In the meanwhile, negotiations are only just beginning on the future trading relationship between the U.K. and the EU, and on a period of transition for Britain after the official withdrawal date of March 29, 2019.
While swings in the British pound's exchange rate could come from those negotiations, many analysts think that the pound has been through the worst when it comes to Brexit-related moves.
However, domestic problems could cause weakness as well. The collapse at the beginning of this week of infrastructure project management giant Carillion (CIOIF) has drawn attention to the extent to which public finances are saddled with spending for so-called private finance initiative (PFI) projects, in which finance is raised by a Special Purpose Vehicle (SPV) from the markets, rather than being provided by the government.
While in theory this sounds good, as it spares the public purse the expense, in practice aggressive cost-cutting, thin margins and innovative ways to stretch cash by the project management firm are in the process of creating a massive headache for the U.K. government. Carillion went into administration on Monday, leaving behind thousands of unpaid bills to smaller subcontractors and a pension fund deficit which the company itself had earlier estimated at around £587 million ($810 million).
The unpaid bills could push at least some of the subcontractors into bankruptcy, as Carillion was their biggest client. Also, some contractors borrowed money from banks while waiting for Carillion to pay them for work they carried out, and now they will have to repay these loans and the interest on them without the revenue they counted on.
Taxpayer money will probably have to be spent to deal with these issues as social security and welfare payments for laid off workers are likely to climb and legal fees could crop up for potential litigation in the wake of the collapse. The government will probably have to borrow slightly more than it had forecast to be able to cover these costs. This is certainly no tailwind for the British pound.
