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