The pound may be at a two-year low – but US and European central bank decisions will have much bigger repercussions

The pound is taking a pasting. The foreign exchanges hate uncertainty and Boris Johnson is delivering that in shedloads. The clear possibility of the UK leaving the EU on 31 October without a deal has pushed sterling to the lowest for more than two years, and I think it will head lower still. For British travellers abroad this will be a glum August.

We’ll come back to the pound and the UK economy in a moment. Focus first on two other things this week: the forthcoming cut in US interest rates and the performance of the eurozone economy. Both are more important to the world economy than the gyrations of sterling.

The US Federal Reserve will cut interest rates on Wednesday. It has signalled that the only issue is whether the cut is by a quarter or a half a percent. Characteristically, Donald Trump is urging a large cut, but if you see this more as a signal of direction and a precaution, the quarter point makes much more sense. The flurry of expectation that were the US economy to slow seriously, the Fed would pump in the dosh that has kept US equities close to record levels and pulled down long-term interest rates too. And because what the Fed does affects world markets, asset prices everywhere have a sort-of insurance policy. If the world economy slumps, the Fed will bail them out – or at least that is what they think.

But this is actually an extremely dangerous assumption, as Ruchir Sharma, chief strategist at Morgan Stanley Investment Management argues here. Japan has done this for 30 years without generating a sustained economic recovery. As he points out, central banks can print the money but they cannot dictate where it goes. Japanese shares are still below their peak at the end of 1989, but insofar as ultra-easy money increases asset price, that benefits those who have those assets – the rich – rather than the economy as a whole.

If the party does continue a little longer, at least in financial markets, it may not continue for the real economy. The US does not look too bad, producing second quarter growth of just over 2 per cent annual rate, but that is a lot slower than the rate of previous months. The European economy, by contrast, has clearly slowed. We get the first estimate of that on Wednesday and the markets expect it to show growth of 0.2 per cent for the quarter, or 0.8 per cent annual rate. (This was the figure for France, revealed on Tuesday but we have to wait for Germany until next week. We also get the UK figure next week, which will at best be flat.)

You have to be careful reading too much into GDP figures, as they are almost always revised, and even if they aren’t, the odd decimal point hardly matters. Nevertheless, it is clear that the European economy has slowed sharply, as Mario Draghi, president of the European Central Bank, warned last week.

Now we come to sterling. The pound’s weakness is not good news, for it reflects uncertainty and, looking back over the past three years, incompetence. Whatever view you take on the fundamentals of Brexit, this has not been well done. However, if you are going to have a weak currency, this is not a bad time to have it.

A weak currency boosts the profits of exporters and squeezes importers. We substitute home-produced goods and services for imported ones, for example by holidaying at home, or switching to English or Welsh butter instead of French or Dutch. Food chains – indeed all production chains – have become so complicated that it takes a while for prices in the shops to reflect currency changes, but eventually they must.

Concern that the dollar is overly strong has pushed Trump into an attack on both China and Europe. There are reports that he is considering ways of reducing the dollar’s strength, though intervention on the exchanges seems to have been ruled out.

When times are good you want a strong currency to hold import prices down and increase living standards generally. But if the global downturn deepens then you want a weak currency to help hold up demand for exports, and accordingly employment.

My guess is that sterling will remain relatively weak for two or three years, whatever the outcome of the Brexit business. That two or three years should coincide with the next cyclical downswing. We are not artificially depressing sterling to improve our competitive position through that period, because foreign holders are depressing it for us by selling pounds. This is like George Soros betting against sterling in 1992 multiplied many times.

So there is a silver lining in the pound’s current weakness. We will hear more about the UK economy on Thursday when the Bank of England produces its once-a-quarter Inflation Report, and once again does not change interest rates. But don’t expect the Bank to try and rescue the pound. Even if it wanted to, it couldn’t.