Untangling the cable: Will the dollar-sterling relationship ever be the same?

UK locked into higher deficits

With sterling trading below $1.20, is it time for investors in US equities to hedge against the rebound from these low levels?

I ask you to look at the history of the dollar-sterling relationship, known as the ‘Cable' by forex traders, and consider whether it could be different this time. Since the Plaza Accord in 1985, which depreciated the dollar in relation to G5 currencies, sterling has traded in a comfortable range between $2.05 and $1.20. Any breach of these purchasing power parity (PPP) boundaries has been quickly rectified, like the reverting force of a stretched rubber band. The band limits have remained stable because PPP has been stable. The two countries have had similar inflation rates over the p...