Sterling falls on Economic & Political uncertainty

Good Morning. Sterling fell again yesterday after a member of the Bank of England’s Monetary Policy Committee (MPC), warned that the British economy could shrink again. At 08:30am 16th March exchange rates are as follows:

  • GBP/EUR 1.1002
  • GBP/USD 1.5048
  • GBP/AUD 1.6446
  • GBP/NZD 2.1368
  • GBP/CAD 1.5316
  • GBP/CHF 1.5957
  • GBP/ZAR 11.143
  • GBP/JPY 136.05
  • EUR/USD 1.3673

UK’s economic problems
One of the MPC’s members has said that she expects the UK economy to shrink. The markets have taken the comments as a sign that the recovery will be very fragile. You can read a full report on her comments on the Times website here.

Another thing that is keeping Sterling weak is political uncertainty. Financial markets fear a minority or coalition government would fail to effectively cut Britain’s budget deficit, forecast to reach 178 billion pounds this year, or more than 12 percent of gross domestic product.

It’s important to remember our fiscal debt here in the UK is the same as Greece. Markets fear that with no clear plan on how to repay the debt, the UK will struggle well after other economies have recovered. This doesn’t bode well for a recovery in rates any time soon.

There are also fears the UK’s credit rating may be reduced. More on that here.

The market will also look to the minutes of the latest BoE meeting, due out on Wednesday, which are expected to show a decision to leave policy unchanged was unanimous.

The chief interest for the market would be in any hints of a resumption of asset buying after top officials said they would leave the door open for further quantitative easing. If there is more, expect further weakness in the pound.

EU Bail out plan
Finance ministers from the EU agreed yesterday to mobilise financial aid for Greece rapidly if needed and that they would effectively be bailed out, however they didn’t actually use that phrase! They said little however about what form that aid would take, who would have to pay it, how much, or when. So to be honest we don’t really know any more than we did last week.

There’s a good analysis of the latest developments in an article on the Reuters website here.

A failure to outline any clear plan may mean the markets keep selling the beleaguered Euro. If so, this may create weakness that could actually cause GBP/EUR rates to climb, however the state of the pound is likely to keep any rise fairly limited.

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