Uncertainty grows as 2015 draws to an end
Davide Ugolini, CFX dealer at Currencies Direct, highlights the financial trends for this month
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