Un­cer­tainty grows as 2015 draws to an end

Da­vide Ugolini, CFX dealer at Cur­ren­cies Direct, high­lights the fi­nan­cial trends for this month

Living France - - Les Pratiques -

As the year comes to an end, it’s time to look to the year ahead. Over­all, 2015 has been a pos­i­tive year for the UK econ­omy. With in­creases in wages, a strength­en­ing job mar­ket and steady GDP growth, in­vestors are in­creas­ing their bets that UK pol­i­cy­mak­ers will want to start rais­ing in­ter­est rates next year. How­ever, the Bank of Eng­land re­mains cau­tious in its ap­proach and is closely mon­i­tor­ing in­fla­tion, which re­mains well be­low its 2% tar­get.

De­spite a slow­down dur­ing the sum­mer, the UK stands to grow by 2.5%. Af­ter three con­sec­u­tive quar­ters of fall­ing man­u­fac­tur­ing out­put, the UK en­ters its fi­nal quar­ter with growth hit­ting its fastest rate. Ster­ling put in an im­pres­sive per­for­mance against the euro over the past year, thanks to a sub­stan­tial im­prove­ment in eco­nomic ac­tiv­ity and the prospect of mon­e­tary nor­mal­i­sa­tion in the near fu­ture. The di­ver­gence of mon­e­tary poli­cies be­tween the UK and the eu­ro­zone is likely to fur­ther sup­port the pound.

The eu­ro­zone’s re­cov­ery is fi­nally con­sol­i­dat­ing. How­ever, the slow­ing of global eco­nomic ac­tiv­ity is cause for con­cern to the eu­ro­zone. The euro has been kept weak by the Euro­pean Cen­tral Bank (ECB), and though it tried to make up for some of its losses af­ter the sum­mer, those gains were lim­ited and short-lived. It only took the press con­fer­ence fol­low­ing the Oc­to­ber meet­ing of the ECB’s Mon­e­tary Pol­icy Com­mit­tee for those gains to dis­ap­pear. In­ter­est rates were left un­changed, but ECB Pres­i­dent Mario Draghi man­aged to sur­prise in­vestors dur­ing the press con­fer­ence. In­vestors were caught off-guard as they were pre­sented, not only with the very real pos­si­bil­ity of more eas­ing in De­cem­ber, but also with a cen­tral bank that’s ac­tively ex­plor­ing lower de­posit rates; ex­tend­ing the dead­line on its quan­ti­ta­tive eas­ing pro­gramme; and po­ten­tially in­creas­ing the size of it.

In­vestors couldn’t sell their eu­ros quick enough as the im­pli­ca­tions of Mr Draghi’s speech hit home. The up­shot is that, be­fore the pre-Christ­mas ECB meet­ing, we could see a mar­ket that’s in­un­dated with eu­ros.

Un­cer­tainty as we near the end of 2015 is mount­ing and the world’s cen­tral banks will try to rid in­vestors of their fears. Be­fore Christ­mas, the US Fed­eral Re­serve will meet to de­cide whether the time is right to nor­malise its mon­e­tary pol­icy and start rais­ing in­ter­est rates. The Fed’s de­ci­sion will have im­pli­ca­tions for the UK: The Bank of Eng­land is ex­pected to fol­low suit, so a lift-off for US rates should also clear the UK’s for launch. www.cur­ren­cies­di­rect.com

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