As I write this, Sterling’s trade weighted index is at its lowest figure since December 2013. However what’s more concerning for the Pound is the lack of economic data releases for April, a hanging decision over the UK’s steel industry, and the EU referendum that projects a country split between a ‘stay’ or ‘leave’ vote. There doesn’t appear too much in the way of good news for Sterling.
That’s not to say there won’t be opportunities to take advantage of small rate increases, this morning important PMI data came in weaker than expected but improved on the previous release. There’s potential for a slight jump on the GBPEUR rate over the course of the day, but I think it’s unlikely that we’ll see the rate trading back above 1.26 throughout the day’s trading session.
External factors could put more pressure on Sterling
Wednesday see’s the Federal Open Market Committee meeting minutes released from the previous week’s statement, where once again there was no rate hike. Janet Yellen has remained dovish as global uncertainty has made increasing rates a risky business. However as US unemployment has dropped, wages have increased along with inflation, the second rate hike of the year is now looking more viable. The minutes release will reveal the reasons for the previous decision to hold rates and what the thoughts are moving forward, if the outlook is positive it’s very likely the Dollar will strengthen.
Later in the week on Thursday the European Central Bank deliver their monetary update followed by President Mario Draghi’s speech regarding the economy in Europe.
The speech will be widely anticipated as the market will receive its first update since the introduction of further Quantitative Easing and the central bank deposit rate cut. Investor’s will be tuned in to Draghi’s tone during the speech and depending on the outcome, the Pound could fall further.
Sterling faces a pivotal few weeks
The run up to the referendum has already started judging by the drop in the GBP/EUR over the last few months. Recent data has shown just how reliant the UK economy is on the EU and an ‘exit’ could potentially turn investors away from the UK. The Leave campaign has been picking up momentum with some opinion polls suggesting they are leading the race. The economy in Greece and the migrant problems faced by the EU may present a dilemma for Europe as there is real potential that these problems could spill over.
There are current discussions regarding the Greek debt involving the EU and the IMF that culminate on the 22nd April, if no solution is found the Euro could well lose some of its recent gains. However I would not be surprised to see GBP/EUR rates drop towards the low 1.20’s as we approach the EU Referendum on the 23rd of June. The impact on GBP/USD rates could also be negatively impacted in the run-up, with exchange rates likely to drop below the 1.40 mark.
