The Pound’s dreadful start to the year
Investors with a bullish outlook on the British Pound (Sterling) have been dealt a number of blows in recent months with the currency losing over 3% of its value in trade weighted terms since the beginning of the year. Those with an interest in converting GBP into EUR have just witnessed the longest running downward trend between the pair since the Euro was introduced in 1999.
These falls have been due to a number of factors with the China-centred global slowdown, the dovish tone of Mark Carney (Governor of the Bank of England) in his last two speeches, an interest rate hike unlikely this year and perhaps most of all, the potential for the UK to vote in favour of leaving the EU (also known as the “Brexit”).
There weren’t many surprises as the Bank of England (BoE) left the basic Bank Rate unchanged at their February meeting, but this time all of the 9 MPC members voted in favour of unchanged interest rates, with Ian McCafferty dropping his call for a rate hike.
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Sterling Forecast for 2016
The general consensus surrounding the Pound is bearish at present, with Bank of America Merrill Lynch forecasting that cable (GBPUSD) could fall below 1.40 and that those converting Euros could receive around 80 pence for each Euro (current levels are around 77 pence). Goldman Sachs are particularly pessimistic surrounding the potential for a Brexit suggesting that Sterling could lose up to 20% of its value and trade around the GBPUSD 1.20 to 1.15 mark, adding that the fake rolex UK would be ‘at risk of an abrupt and total interruption to incoming capital flows’.
Personally I’m a little more optimistic and believe that much of the uncertainty around the Brexit has already been factored into the value of cable and should the UK vote against the Brexit we could see significant strength in the Pound and perhaps a strong rebound. I also believe that should the FED (Federal Reserve Bank of America) cool off its aggressive interest rate hike approach we could see weakness in the US Dollar improving buying rates for Sterling sellers. Further Quantitative easing by the ECB could weaken the EURO and should the fears around the Brexit subside I can see Sterling strengthening later in the year as economic data coming out of the UK at the moment show that it’s performing quite well when compared to its peers.
Many analysts had questioned, once the FED had raised interest rates once, how soon the next rate rise would be and how much the Central Bank would hike interest rates by with some suggesting it could be as much as 3 interest rate hikes ending with interest rates up at or over 1% by the end of the year. However, with the recent downturn in the global economy the chances of further rate hikes seem to have been put back and in fact there is now the question of whether the FED will raise rates at all this year. As a result, the US Dollar (USD), has slowed its recent strength against most the major currencies although it is still very strong against both the Euro (EUR) and the Pound (GBP).