Not since that unforgettable night in June 2016 when the UK awoke to a yes vote for Brexit, has Sterling been at the levels that its reached today against the USD – 1.3800 (see Figure 6) I could of course give the generally accepted explanation why we are here….USD retreats on back of ECB normalisation, EUR strengthens on a breakthrough in German government talks, GBP higher on Brexit progress despite UK Inflation’s retreat to 3% from 3.1% for the first time in 6 months, Sounds plausible, even vaguely intelligent perhaps..but on closer inspection it’s not what was said during the past few months as to why we might break 1.36 and reach 1.3800 – back then it was another list of retrospective fact. Why do we have a tendency to take whatever facts we observed and make them fit neatly into a confident sounding story?
Luckily, Amos Tversky, one of the men responsible for changing how we see the world can explain: “All too often, we find ourselves unable to predict what will happen; yet after the fact we explain what did happen with a great deal of confidence. This “ability” to explain that which we cannot predict represents a flaw in our reasoning. It leads us to believe that there is a less uncertain world than there actually is, and that we are less bright than we actually might be. For if we can explain tomorrow what we cannot predict today, except with the knowledge of the actual outcome, then this outcome must have been determined in advance and we should have been able to predict it. The fact that we can’t is assumed to be an indication of our intelligence rather than of the uncertainty that is in the world.” We forget this on a daily basis, and column inches are filled with market commentary explaining why we might be where we are. The list of variables that influence the FX market are so vast that no two scenarios are the same – so just because the market has done what it has in this circumstance doesn’t mean it will do so again when the headlines look to be similar the next time.
The FX market, like the world, is full of uncertainty, and this year all I can confidently predict is that it will be a very volatile year. Brexit, Trump, European elections, to name but a few of the unpredictable issues plaguing the markets.