Sterling on Track to Hit Multi-Year Lows
Where to Next for the Embattled GBP?
On Super Thursday, the Bank of England and its Monetary Policy Committee announced a series of quantitative easing measures to boost the UK economy. Foremost among them was a reduction of the bank rate by 25-basis points. Now, the UK interest rate stands at 0.25%, an historic low. Of course, quantitative easing (QE) was boosted by £10 billion in corporate bond purchases and £60 billion in asset purchases. This brings the total QE to £435 billion, up from £375 billion.
Combined, these measures are geared towards stimulating economic growth in the UK, which faces critically low inflation rates, lagging growth, and recessionary fears. The first casualty of monetary stimulus is the GBP. For the year-to-date, this currency has depreciated by 11.76% against the greenback, but over the past 1 month it has actually clawed its way back to some sort of respectability with a 0.46% appreciation. This is surprising given the extreme volatility that characterised the UK economy post-Brexit (Thursday, June 23, 2016).
Speculators and the GBP
The GBP is under intense pressure against a basket of currencies. Fallout from the Brexit has cast a dark shadow over the currency and the UK market. This was bolstered by the BOE decision and market confidence is sorely lacking. Manufacturing production data and industrial data have verified the existing trend in the market. The GBP/EUR plunged to 1.1672, while the GBP/USD was trading around 1.30. The UK economy is clearly persona non grata for investors despite the best efforts of Mark Carney, Governor of the Bank of England.
Speculators are bearish on the GBP and the UK economy, but there is no consensus about how low the currency can fall. Spread betting pundits have placed a figure of 1.20 as the next resistance level for the GBP/EUR, and for the GBP/USD they foresee a level of 1.35. Both of these levels however are long-term projections in the currency trading arena: several months ahead.
The hype that surrounded the Brexit decision was bound to take place, but the reality is that until the UK Prime Minister, Theresa May invokes Article 50 of the Lisbon Treaty nothing will happen. The divorce proceedings are slated to take a minimum of 2 years to complete once they have been initiated. The current economic indicators for the UK reflect the following new realities:
- The Inflation rate is at 0.5%
- The Interest-rate is at 0.25%
- The GDP growth rate is at 0.6%
- The Unemployment rate is at 4.9%
- The FTSE 100 index is currently at 6,851
- The Balance of trade is measured at £5,084 million
- The Yield on the 10-year government bond is at 0.58%
Upcoming Economic Indicators for the UK
But more importantly, it’s the upcoming economic indicators that are going to determine which way traders will go on the UK economy. On Thursday, 18 August 2016 a series of important economic indicators will make their way to the markets. These include retail sales ex fuel, month on month for July, and year-on-year for July. There will also be retail sales month on month for July and year-on-year for July.
On Friday, 19 August, public sector net borrowing for July will be released and CBI industrial trends orders for August will be available. On Friday, 26 August, the GDP growth rate for Q2 2016 will be presented. This data will be made available quarter on quarter and year-on-year. Depending on how strong or weak the data is, spread bettors will hedge their bets accordingly. We can expect bullish signals if expectations are exceeded or met, and bearish signals if actual data falls short of expectations.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.