The pound really struggled as we approached the month of August, with many economic concerns resurfacing and there appearing fresh cases of Coronavirus in the UK too. The global economic outlook also suffered but the pound did find some greater movements against the US dollar, rising to back over 1.30. August sees many new events to move the currency markets and the pound sterling forecast, in particular this week I will be looking out for the Bank of England interest rate decision on Thursday which can often be a market mover.
The Bank of England has all sorts of new events to contend with, including some poor UK economic data in August and also the ongoing threat of a second wave. With Greater Manchester having been place on a lockdown, it is of concern that the UK could be headed for lockdown restrictions to be implemented again, with the wide range of potential effects this will have on the currency market.
Looking forward, the Winter months have been mooted as possible times of concern for the virus, since it might well thrive better in colder climate. The usual flu season in the winter months could carry an extra degree of caution because of the Coronavirus.
Will the Bank of England Take Any Extra Action?
Whilst it is doubtful the Bank of England will embark on any further policy changes, it might be that they follow suit of their American counterparts at the US Federal Reserve, and highlight their willingness to continue to provide as much support as necessary, to stimulate a recovery.
Such ‘dovish’ or soft language by a central bank can usually trigger weakness in a currency, since it implies a likelihood of interest rate cuts or other policy measures. In the case of the Bank of England, there has been speculation regarding negative interest rates.
Andy Haldane, the Chief Economist at the Bank of England caused the pound to rise some weeks ago in being very optimistic that the UK would experience a v-shaped recovery. The May GDP (Gross Domestic Product) data showed this not to be the case, with GBP coming in at 1.8% versus the 5.5% predicted.
What appears possible in May is that the currency market will begin to take more notice of economic data, and Monday 10th August sees further GDP data which will provide further evidence of how the UK economy is performing.
Meanwhile, there are millions on the furlough scheme and UK government borrowing has soared to eye watering levels, which only further dampens appetite for the pound by historic measures. The latest data in August will therefore provide more evidence of how UK plc is performing and outline to what extent the recovery is progressing, and how likely further action by the Bank of England is in the future.
Brexit Deadline Gets Closer and Closer
Looking throughout August, Brexit is still far from decided upon and there is still the latest trade deal to be finalised. The deadline is December 31st and this markets the end of the transitional phase, but there has been suggestions October is a key time since they should really have agreed a deal well before the end of the year.
This is because for any deal to become enshrined in EU law, it must be voted on and agreed by all the individual members of the EU well before the year end, as it takes them time to do this. Expectations for a deal to be reached may well continue to intensify with the predictable behaviour for the pound we would expect, which includes weakness on the likelihood of no-deal, whilst any signs of a deal could see the pound rise.
Both sides seem reluctant to make the major concessions needed, and Boris Johnson has said he will walk away from the talks with the UK appearing to not be very concerned about striking an arrangement any time soon. Whether this will be part of a clever negotiating plan or not will become clear in the coming weeks, the lack of clarity seems likely to be a continued topic to enhance the volatility for the pound.
The Coronavirus has made the currency markets even more unpredictable and volatile in many respects, and we can help share with you the latest news and provide tools to help provide you make an informed decision and strategy on your transfer. If you would like to discuss the markets in more detail, please do contact me directly using the form below.
