Sterling pairs were broadly range-bound yesterday after a quiet day of eco-stats. As yesterday was so boring, this report will look at the factors that caused the pound’s recent demise and what it may mean for GBP crosses going forward.
GBP/EUR 3 month graph
The above chart illustrates how sterling has lost value against the euro in the last three months. Sterling’s fall could be, loosely, attributed to three separate catalysts: the tremors in the Chinese economy, the Bank of England’s more dovish outlook and the potential outcome of the upcoming EU referendum.
The pound first began its course after the Chinese equity markets suffered huge shocks. The breadth of their financial roots means that when the dragon sneezes the world could catch a mighty cold. The FTSE felt the brunt of this, more than most, largely due to the large trade links we share with the Chinese.
Even now that their economy isn’t front page news there still remains real doubt over the Chinese’s ability to maintain their exponential growth and another shock could potentially remain just around the corner.
This global uncertainty also contributed to the Bank of England’s change of heart on monetary policy. GBP crosses gained enormously last year after speculation grew that the British economy could be on the cusp of an interest rate hike.
Yet, with the shocks in the global economy, Mark Carney and Co. were forced to do an about-face on their potential plans. Sterling felt the full weight of this when Ian McCafferty was forced to drop his stance as “lone-dissenter” and voted to keep interest rates on hold (the MPC vote was 8-1 and is now 9-0 again).
The latest challenge for the pound is the potential “Brexit” that could be triggered by the newly announced EU referendum. Euro-scepticism isn’t a new concept to British politics but the isolationists were awarded a mighty coup recently in the hulking, dishevelled form of Boris Johnson.
Anti-EU sentiment has had something of a PR problem in recent years; mostly, because the face of the movement was the ruddy blotched cheeks of Nigel Farage. Whilst Farage seems like an amicable chap, one you could happily enjoy a pint with or crash a lightweight aircraft, he doesn’t have the political gravitas of the Mayor of London.
BoJo presents a credible threat to the status quo; underneath the clown makeup and daft haircut is an intelligent politician capable of courting the hearts and minds of the British public (evidenced by his two terms in London Office).
Whether his backing of a “Brexit” is simply a ploy to spoil Gideon’s party or genuinely an act of political duty, in many ways, is irrelevant to the pound’s fortunes. By entering the fray he has paved the way for other higher profile politicians to follow suit- giving credibility to a cause broadly dismissed in previous years.
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Just after midnight we had Consumer Confidence readings for the UK and this morning we have had French GDP readings. Later, the most significant announcements will be: German CPI figures and readings of the Harmonised Index of Consumer Prices; and from the US, GDP, Goods Trade Balance and Core Personal Consumption Expenditure Price Index figures.