As the Bank of England put measures in place to limit market volatility, the markets look to next Thursday's interest rate decision which could see the UK's first cut since 2009.
Sterling remains under pressure across the board, despite a slight recovery during yesterday’s trading. The fallout from the recent Brexit decision continues to hit investors and client’s wallets alike, with the markets trying to digest and weigh up the damage its already done to the UK economy. However, the question we should all be asking ourselves is how much worse can it get and when are we likely to see the Pound fightback?
It is clear that the markets have viewed the decision to leave the EU as the wrong one and Sterling’s value has decreased significantly as a result. Whilst the current trend is unlikely to last forever, the main concern amongst those clients holding GBP is that we have not yet seen Sterling’s bottom line.
GBP/EUR exchange rates dropped below 1.16 earlier this week, whilst GBP/USD rates hit a 31-year low at 1.2775. With another recession looming and two of the key Leave campaigners jumping ship at the earliest opportunity, I wonder how many of those that ticked the Leave box will be questioning their decision? Regardless of personal opinion democracy has spoken and it must be adhered to but with so much uncertainty hanging over our heads, both economically and politically, I think it will be extremely difficult for the Pound to gain any sustained support in the short-term.
We also need to consider the BoEs position and governor Mark Carney was quick to point out the pitfalls facing the UK economy following the referendum decision. Whilst our central bank has a responsibility to ensure the welfare of our economy, they also viewed the decision as a major danger to our economic prosperity and as such, will now need to put measures in place to offer some protection. The first of these is a likely interest rate cut, which as discussed by my colleague Jonathan Watson in yesterday’s report, could come as early as next Thursday. Even if they decide to keep rates on hold for now, I believe a cut is imminent and that is likely to heap further pressure on Sterling.
With economic data from the UK mixed at best (as highlighted by yesterday’s Industrial Output figures) clients should be looking to protect themselves from further negative downturns, in order to ensure they do not cost themselves more money on any short to medium-term GBP transfers. Clients who are purchasing foreign property need to ensure that they can budget around a certain exchange rate and we can offer them this protection in the form of one of our forward contracts. We can also help to keep clients navigate through, what has become an increasingly unstable and uncertain market place.
Looking forward and once we can start to remove some of the uncertainty surrounding the UK political and economic situation, then hopefully the Pound can start to find some traction and a sustainable improvement will become more feasible.
With further uncertainty around the corner, speaking with your brokers today may be beneficial. Call our trading floor on 01494 725 353 or email me here.
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