In today's post, I will outline the reason the Pound has fallen so much, and take a look at both the short term outlook for this week, as well as the more medium to long term outlook for the Pound, giving my view on whether the Pound go up or down against the Euro and US Dollar in 2016. First, a quick look at the charts for the last 1 month:
GBP/EUR last 4 weeks:
GBP/USD last 4 weeks
Why has the Pound fallen so much this year?
This week the governor of the Bank of England stated that there is no set timetable for an interest rate hike in the UK. His comments have all but written off any chance or rates rising at all in 2016, and as such, the Pound has continued to fall further against the Euro and other currencies.
He also said the both global and domestic growth was much weaker than had been expected when he originally outlined a rate hike would probably happen in early 2016, and that collapsing oil prices mean that loose monetary policy will continue. In addition, volatility in China that is experiencing its lowest growth in 25 years is also weighing on global growth.
Indeed UK growth for the whole of 2015 was only 0.5% which is pretty disappointing. So let's summarise why the Pound is dropping so much:
- UK and Global growth is very slow
- Interest rates are staying at their record low
- Uncertainty due to the UK EU referendum
- Inflation and wage growth
- Low Oil and Commodity prices
Will Sterling go up or down in 2016?
In the short to medium term, I think it's very likely that the Pound will fall further. The points above are unlikely to change any time soon, and with the EU referendum tipped to take place later this year, I think that we could well see the recent downward trend continue due to the uncertainty this will create.
Against the Euro, we are now sat at the key €1.30 level. If it drops much below this, then it's likely to continue to do so. Since late last year, a €300k property abroad has increased in cost by £25,0000.00, which shows how quickly exchange rates can impact on things like a foreign property purchase, or buying/selling goods in the Eurozone. Those that need to buy or sell in different currencies need to take stock of their requirements, look at the options available, and decide how to proceed with regards to fixing a rate.
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Longer term, the Pound/Euro rate is likely to recover back to the €1.40 level, but this may take quite some time. Before this happens, we need to see UK and global growth bounce back, and also some confidence return to the markets. Until China's growth picks back up and oil and commodity prices recover, UK interest rates and along with it the Pound are likely to remain very low.
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