Tuesday, 28 June 2016

Sterling makes gains, but will it last?

Today the Pound has managed to claw back some of its losses against the Euro and US Dollar, but the question is, will the Pound keep going up, or is this a temporary spike?

Today has seen GBP/EUR climb to €1.21, and GBP/USD to $1.34. Normally you would think this is a pretty decent rise, but when you compare it to the sharp falls we saw last week in the wake of the EU referendum, it's not a huge recovery although it is positive. There hasn't really been anything in particular that has caused the rise. I think it's mostly due to the fact that things have now calmed down a little, and perhaps the 'Brexit' won't be the end of the world after all. It's looking increasingly likely that once negotiations start, there will be a real push to make deals that suit both the UK and the EU, in terms of trade, movement of people, and agree to something that's favourable for both sides. Also, as nobody expects 'Article 50' of the Lisbon treaty to be invoked any time soon, this will give the markets time to calm down.


No need to panic over Brexit


I thought that comments by the old BoE governor Mervyn King summed things up pretty well when he said there is no need to panic. "Markets move up, Markets move down. We don't yet know where they will find their level, and the whole aspect of volatility is that there is a trial and error process going on before markets discover what the right level for exchange rates are" This is what we've been seeing over the last couple of days.

He also added that he was struck by the scaremongering tactics throughout the campaign, saying that people didn't like being told that if they voted leave they would be idiots. As he correctly surmised, if you say to someone "you're an idiot of you don't agree with me" you are not very likely to bring them to your direction.  He added that the Remain campaign went well beyond what they should have said in terms of what the effects might be to the economy. So regardless how you chose to vote, this is where we are now, and the world is still spinning.

Will the Pound fall further?


Moving forwards, some banks are forecast that rates will drop further, as investors fear a recession. Time will tell if that will happen. What is likely is that the Euro is also likely to suffer due to a fall in demand and fears that other EU nations may voice their intentions to hold their own referendums. Personally I think that the BoE will need to now cut interest rates before the end of the year, so I expect the Pound to remain weak in the short to medium term, but it may now have found its feet against the Euro.

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