EU Summit to take centre stage
This week could be crucial for both the value of Sterling and the UK as a whole as this upcoming Thursday see’s the start of the EU leaders summit with David Cameron, Prime Minister of the UK expected to fight to clinch a deal to keep the UK within the EU.
The Pound has been under increased pressure as of late with fears of a UK exit from the EU, known as a ‘Brexit’, weighing on the value of the Pound with the Euro recently hitting a 15-month high against Pound Sterling.
This political uncertainty is bound to impact the value of Sterling, especially in current market conditions as the last time the UK was faced with an uncertain future the value of the Pound fell by 8% around the time of the Scottish Referendum.
On a similar note if we go back to 2010 and remember the ‘flash crash’ after the news broke that the UK had a hung parliament it allows us to prepare for what could potentially occur should we see a Brexit. Numerous investment banks, most notably Goldman Sach’s have suggested that Sterling could fall a further 20% should the UK go ahead with a Brexit, bearing in mind that the Pound has fallen roughly 6.5% since the beginning of December it gives us an idea of the importance of David Cameron’s meeting with other EU leaders later this week at the summit.
Sterling starts week on a positive note
On a more positive note for Sterling bulls, the Pound begun the week strongly as it was up over 1% against the Euro in the early hours of Monday morning. This bounce was most likely influenced by a strong start to the week in Asian stock markets as the Japanese Nikkei had its strongest day for 3 years, up 7.2% off the back of hopes for both Japanese and European economic stimulus.
Moving forward I believe the value of the Pound will be driven by market sentiment as well as the fears over its continued EU membership. Due to its high interest rates and large current account deficit the Pound isn’t treated as a safe haven asset and tends to benefit when stock markets are bullish and commodity prices are increasing, very recently we’ve seen sterling benefit from global stock market bullishness and things have opened up similarly this morning with the Pound up against all other majors with the exception of the Japanese Yen. Sterling sellers may wish to take advantage of the past two sessions gains as later in the week we could see further swings.