Thursday, 4 February 2016

Sterling falls after BoE Super Thursday

As predicted in my post earlier in the week, the Pound has fallen sharply today after the Bank of England's 'Super Thursday':


Why did the Pound fall?


In it's quarterly inflation report, the Bank of England (BoE) cut their growth forecasts, and downgraded economic expectations. Also, all 9 members are now unanimous in their voting to keep rates on hold, with all 9 members deciding to keep the rate at the record low of 0.5%.  Wage growth is easing,and they've now made it pretty clear that inflation is going to remain low for 2 more years, and interest rates will therefore likely remain at their record low for a long time to come.

With a slack economy and the BoE being very dovish today, Sterling has not fared well as the graph above shows.

Will the Pound rise or fall in the coming months?


I think there are serious downside risks for Sterling at the moment. There's nothing I can see that will push the Pound higher, and the EU referendum will soon come into focus. I read this morning that Goldman Sachs have said that if the UK does vote to leave the EU, the Pound could fall by 10% to 15%. That would put Pound/EUro rates down to around €1.11!

The more uncertain the outlook is for the UK economy, the more volatile markets will be, so my view is the coming months could put the Pound under serious pressure against other currencies.

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