Scottish Poll Causes Sterling Slide
A poll showing the vote over Scottish independence is getting tighter (with the YES campaign sharply narrowing the gap with their No counterparts) saw sterling slide against most majors. The vote takes place later in the month and the uncertainty over what would happen to the pound, and UK businesses based in Scotland, has been weighing down sterling. Markets do not like uncertainty or surprises as it often results in a lack of confidence and inability to forecast ahead, hence the pound being sold off.
Personally I am still not convinced that Scotland will vote yes and therefore once the vote is out of the way I expect this weight on the pound to be lifted. However anyone expecting the pound to rocket up is likely to be disappointed as I think the pound is unlikely to gain much further until we get a clearer timescale over when and how much UK interest rates will go up. The next Bank of England decision is on Thursday and nobody is expecting a change from the 7-2 vote in favour to hold from last month. Inflation has dropped a touch in the UK and retail figures haven’t hit the levels expected. Also I get the impression the BofE are reluctant to do anything that might hamper the recent economic recovery, particularly as certain sectors (namely construction and manufacturing) are nowhere near the levels they need to be to support a balanced economic recovery.
ECB Decision This Week
Carney has highlighted the strength of the pound as a possible barrier to growth (in that it will make it harder for UK exporters), and the UK deficit is still an issue, so all in all I don’t foresee a rapid increase for sterling. On the Euro front there is the possibility that the ECB may do something to counteract low inflation and these unusual measure could seriously weaken the Euro so on that note GBP EUR rates could be very volatile. In my view I think the current rates are a good buy in the short term, as I suspect the ECB may still take a wait and see approach, but long term I think the Euro will continue to struggle and intervention from the ECB will be inevitable.
US Non Farms This Week
Friday sees the latest non farm payroll, and I have been saying for months that the Dollar is undervalued against sterling. US data is slowly but surely improving and at some point the Fed will give a clearer view on a more hawkish monetary policy, which should help the Dollar. Also the troubles in the Middle East and Ukraine, the worries over what Europe may do with some form of QE, and the issues of Scottish independence for the pound have all caused a flight to safety in the good old greenback. If news on Friday is good it could boost global confidence and further reinforce the recent recovery for the Dollar.
RBA Hint At AUD
The RBA didn’t make any change at their meeting although Governor Stevens did talk about the strength of the Aussie again which may worry some holding AUD. With upcoming GDP and retail figures Down Under, and a lot of US news at the end of the week, it would be wise to keep a close eye on the GBP AUD see-saw as I suspect the Aussie may be near peaking versus the pound in the short term.
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