The sterling exchange rate has once again started falling against most major currencies, which has begged many to ask the question and to why the pound seems to be so out of fashion at present?
If you look at the core principles surrounding currency strength there is an almost immediate answer, in my view a currency moves off of two key factors; economic performance and political stability. You could argue that acts of terror and acts of god also have an impact but not so much on a day to day basis, thankfully.
Let’s look at the U.K in terms of all four elements, to ask the question why is the pound falling today?
First and foremost we have economic performance. Unless you have been hiding under a rock somewhere for the past few months it’s no secret that not only the U.K but indeed the vast majority of the world is facing a turbulent time at present, and will no doubt face a significant economic hangover once this terrible situation is over.
The sheer sum of money that must have been spent by the Government in the U.K is somewhat of a worry, on one hand it has been a godsend to millions of people and a lot of companies and may have saved millions of jobs but on the other hand at some point people will like end up paying for it, and with borrowing at a record high there are a few concerns over how this situation will resolve itself, we may be looking a decades before we are back on the front foot again properly.
All of these concerns along with the overall global worries are leading to vast drops in the stock markets, and with a lot of the money invested into the FTSE in the U.K being foreign money, this money appears to be heading home at the moment to what are deemed ‘safer haven’ shores. This is decreasing demand for the pound and assisting in its loss of value.
Back in March, when the first wave of the pandemic started to look like it would impact the western world we saw GBPEUR drop to 1.0590 and GBPUSD into the 1.14s.
The B Word Weighing the Pound Down
Now this is where we slightly differ compared to the majority of the world, not only are we in the middle of a pandemic which is causing the loss of tens of thousands of lives, shutting down previously healthy businesses and costing the nation billions of pounds, but we also have Brexit to contend with.
Brexit seems to be another grey cloud over the head of sterling and is a real concern for investors and speculators alike. Until we have a clearer path as to what the plans are moving forward, and whilst a no deal scenario is still a possibility, it’s hard to see sterling making substantial ground on any of the major currencies.
Put it this way, if you looked at the U.K/pound as a business and you were considering investing into that business or buying shares in it would you even contemplate it at present? With no clear path, no rock solid business plan and so much uncertainty I am sure I would most likely swerve it until I had a bit more certainty as to where it was heading and how it planned to do that. You are essentially seeing the same with investors and speculators at the moment. which is leading to the pound being left alone. This could be part of the reason it feels like sterling is currently being treated like an emerging market currency.
I say this because every time investors around the world are becoming more risk adverse the pound seems to be losing value, when confidence comes back into the market the pound is gaining value, very similar to that of emerging market or ‘riskier’ currencies/ economic areas around the world.
All in all the outlook on the pound is a fairly gloomy one but the sun could come out very quickly if there is some positive Brexit news, so all is not totally lost, but it does seem like this news is needed for any significant strength.
The U.K and EU are now in the next round of negotiations, and weekly talks will be taking place from now until the end of July, Boris Johnson has commented that he would like more ‘ooomph’ in talks this month and that he aims to have a deal done by the end of the summer, so watch this space!
End of Month Flows
Today is the last trading day of the month and indeed the second quarter of the year. For those readers that aren’t aware this can lead to quite sharp market movements which is mainly down to end of month flows.
End of month flows is where larger funds look to net off their positions for the month and also the quarter, so there can be very large currency transactions taking place which often move the market without any prior warning.
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