Stock market correction lends support back to the pound. What could happen to sterling exchange rates?

Following Mondays bleak day for global stocks in which the Dow Jones fell by 4.6%, its largest daily loss since 2011, markets have made some what of a recovery lending support back to the pound.

In particular we have seen the pound make a good recovery against the US dollar up from yesterdays low of 1.38 to reach a day high of 1.3950 although this current market volatility we are seeing could easily continue for the rest of the week.

Looking away from stock market fluctuations and anyone with an interest in the pound should focus on tomorrows Bank of England interest rate meeting and accompanying statement. Again we are not expecting to see any action from Mark Carney but his accompanying statement is the area to focus on. With many of the major central banks, in particular the Fed hinting at future interest rate hikes the markets is looking for clues as to when the UK may follow suit. Indeed the prospect of future interest rate hikes in the US was much of the reason the stock markets have seen such a turbulent run.

Why have the markets reacted?

We have been through an era of central banks printing more money in a bid to make money more freely available to get people spending in order to help economies grow, this has been supported by historically low interest rates. In recent days investors have looked at rising bond yields, higher wage growth and higher commodity prices, all key indicators to rising inflation. By the central banks moving away from this period of printing money and low interest rates and removing this stimulus, investors have been spooked and created this sell off.

Some could argue the market needed a correction, indeed the Dow Jones had gained over 25% during 2017. This growth was not sustainable and the bubble was due to burst and the market is now very finely balanced. Personally I wouldn’t be surprised to see more losses and a further drive into the safe have currencies like the US dollar. With on going Brexit concerns the pound is certainly not a safe bet and I wouldn’t be surprised to see the pound suffer further in the coming days.

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