Sterling has been struggling to maintain its strength lately as investors become increasingly concerned over the outlook ahead. The potential for the pound sterling forecast to weaken is a real possibility with various concerns over which may threaten its strength.
In order for the pound to stage a recovery soon we will perhaps need to see shift in sentiment to the British currency which has so far been on a losing streak. Against the US dollar and Euro the pound has lost around 3% this month, and sterling hit fresh seven week lows against both currencies last week.
To understand whether or not and perhaps when the pound will recover, we need to look more closely at the reasons for the decline and what the likelihood is that it will reverse.
1 – Poor Economic Outlook
Firstly, much of the uncertainty and weakness can be traced to the Coronavirus and the poor state of the UK economy predicted for the future.
The pound has a long history of struggling when the UK suffers from an economic point of view, and the talks of long ‘significant’ recession ahead by the Chancellor Rishi Sunak has not provided much inspiration for investors.
It is becoming more and more apparent that we will not be seeing a sudden return to economic growth with 2021 predicted to still see the economy smaller than where it is now. So long as the UK is under a lockdown, and consumers and business cannot spend money as freely as they might have previously wished, the outlook for the UK economy and the pound seems weak.
The global economy too is struggling, which means there will be less international demand for UK products and services, which will only pile further pressure on the British economy.
2 – Negative Interest Rates
This week has seen the Bank of England discuss that they are discussing the possibility of negative interest rates which could easily pile some pressure on the pound ahead. Typically, the lowering of interest rates makes a currency weaker by making it less attractive to hold.
With the Bank of England predicted to need further stimulus if the UK economy continues to suffer, the possibility of the pound falling further ahead remains.
This threat could be easily reversed however, if the currency markets suddenly become more optimistic that negative rates will no longer be necessary. This is a real possibility as the Bank of England has only said it is considering this prospect, it is not definite. A reversal of sentiment on this point could see sterling make gains as investors have more confidence.
3 – No-Deal Brexit
An unsurprising point to regular readers! Whatever you think of Brexit, the potential for a no-deal exit is not providing any real confidence to financial markets and leaves investors fearful for the future of the UK outside of the EU, its closest and most valuable trading partner.
As we approach the June 30th deadline, which is the last time to agree an extension, something the government has already ruled out, the potential for increased uncertainty over leaving on December 31st 2020 with a no-deal exists.
We know how sensitive the pound has been to uncertainty over Brexit in recent years and this topic, combined with the points above all has the ability to pile some added pressures on sterling and provides further cause for concern in the future.
Despite the government ruling out an extension, the pound could find some favour on any prospect of an extension being considered, or signs a deal can be struck. With uncertainty over the Coronavirus affecting all of Europe’s economy too, it is being said that more than ever a no-deal is not in the Eurozone’s interest, as it too struggles to get its economy back on track.
This could be an impetus for a last minute deal to be reached which would potentially see the pound rising although if negotiations are going to go down to the wire, the pound could have been really put through its paces by that time.
At present there are numerous clouds circling the pound, but don’t underestimate the potential for the currency markets to have a sudden change of heart. Next week is some new important economic news and data that could easily see events take a sudden twist or turn.
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