British Pound on Course for a Disastrous two Months
We currently find ourselves in a uniquely complex forex landscape.
The rampant dollar is seen as something to fear in the US markets, whilst the euro has spent the last few months in a QE-inspired contentious relationship with its region’s indices, something that is only just beginning to cool.
With its peers finding themselves in near-constant chaos, the pound has only just begun to enter the fray with its own set of specific problems, as well as some old favourites.
The perpetual interest rate-hike discussion that has dominated US financial discourse of late arrived on British shores last week, with the Bank of England’s chief economist Andrew Haldane commenting that rates could be slashed to zero in the next few months, a far cry from the steady, but hopeful, comments of Governor Mark Carney.
Yet with inflation falling to zero for the first time since the Consumer Price Index was implemented in 1989, deflation, and a rate cut, is a very real eventuality.
These latest inflation figures are not the whole-hearted positive the Conservatives would like the public to believe.
Whilst US investors are scared of what a stronger dollar would do to its already damaged multinational corporations, meaning a delayed rate-hike is perhaps preferable, the UK doesn’t have the luxury of a strong currency.
In fact, last week’s disappointing wage growth data sent cable to a 5 year low, even if George Osborne’s Budget quickly swept away this issue from investors’ minds.
And talking of the Budget, the upcoming May general election poses the biggest threat to sterling’s stability.
The FTSE, currently trading at record highs, has the current form to weather the sure-to-increase uncertainty surrounding the election; the pound, on the other hand, does not.
If the Scottish independence vote caused severe palpitations for the pound back in October, then the most unclear election in 30 years may give it a heart attack.
Yet this is to be expected, and traditionally this instability should pass after the ballots have been counted.
However, and it’s a big however, the political situation in the UK stands a large chance of being just as fractured as it is now after May 7th.
The likelihood of a minority government appears to be on the rise and with it no immediate end to the unstable, and pound damaging, political landscape.
So where does this leave sterling?
It has already been struggling recently against the dollar in a way that even the euro, so heavily hit by the implementation of ECB QE, has managed to deal with more effectively, and this without its true period of trouble even beginning.
Its only hope of avoiding a disastrous two months may be the shaky foundation of the US dollar’s strength, with the greenback’s growing lack of support reflected in its choppy, if still strong, performance last week.
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