Of FC Ex­change, ex­plains why the pound is find­ing it hard to re­cover in the cur­rent mar­ket

Charles Mur­ray,

Living France - - Les Pratiques -

As we push fur­ther into 2016, the spring months are un­likely to bring much joy for the GBP/EUR rate, as it has con­tin­ued to push grad­u­ally lower from the dizzy heights of 1.40 seen last Novem­ber.

The pound has been un­able to gather any size­able pos­i­tive mo­men­tum and has been pow­er­less to bring it­self out of a pe­riod of sell­ing pres­sure due to a raft of poor UK eco­nomic data. With man­u­fac­tur­ing, pro­duc­tion and in­fla­tion all in a pe­riod of stag­na­tion, the Bank of Eng­land has been in no po­si­tion to con­sider rais­ing in­ter­est rates to al­low the pound to re­cover. In fact, one of the main rea­sons the pound is un­der so much pres­sure at the mo­ment is the no­tion that Mark Car­ney, the Bank of Eng­land Gov­er­nor, has hinted that they may even cut in­ter­est rates in the UK be­fore putting them up. This is ul­ti­mately neg­a­tive for the value of the pound, but a re­al­is­tic prospect if growth lev­els in the UK con­tinue to re­main low and pose a prob­lem for Car­ney. I’m cer­tain Mark Car­ney would love to be in a po­si­tion to in­crease the bor­row­ing cost, but with lev­els of in­fla­tion well be­low the Bank of Eng­land’s tar­get of 2%, there seems lit­tle else they can do to halt a po­ten­tially stalling econ­omy.

As fears con­tinue to mount over the out­come of the ref­er­en­dum tak­ing place in June, the pound has con­tin­ued to suf­fer as un­cer­tainty tight­ens its grip, and the pound suf­fers day by day. As ter­ror­ist ac­tiv­i­ties around the world con­tinue to add risk and play havoc with mar­kets, the pound has fur­ther suf­fered as the topic of im­mi­gra­tion and na­tional se­cu­rity has no doubt pushed more peo­ple to­wards the de­ci­sion of leav­ing the EU. This, ad­versely has cre­ated more un­cer­tainty and weak­ened the pound fur­ther.

Across the Chan­nel, in Europe, the Euro­pean Cen­tral Bank (ECB) pres­i­dent Mario Draghi has un­leashed an ex­tra­or­di­nary pack­age of growthen­hanc­ing mea­sures against a flag­ging econ­omy, while at the same time cre­at­ing fur­ther un­cer­tainty in the re­gion. By cut­ting in­ter­est rates to zero, ex­pand­ing its money print­ing pro­gramme and re­duc­ing the bank de­posit rate fur­ther into neg­a­tive ter­ri­tory, the ECB has fired its ‘bazooka’ in an at­tempt to stim­u­late growth. The ini­tial re­ac­tion from the mar­ket was good and has given the euro some strong sup­port. How­ever, in­vestors should be aware that there is lit­tle else Mario Draghi can do to strengthen the eu­ro­zone econ­omy if his re­cent at­tempts are fruit­less.

Look­ing for­ward, the EU ref­er­en­dum opin­ion polls are likely to guide the mar­ket in the com­ing months, so pre­pare for a rough ride. fcex­change.com

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