The future of the British currency became quite uncertain the weeks leading up to the Brexit vote last June, then slumped after the results came through. Now it seems that for the first time in 2017 investors are changing their views on the pound for the better. However, this pertains to the pound vs the dollar; where the euro is concerned, the situation is different.
This discrepancy could be easily explained. For one thing, investors expected a lot more from the US economy, mostly riding on Donald Trump’s promised goals as president, especially his vow to bring economic growth up to 3%. This is easier said than done, as we’ve seen. Lukewarm reports from the United States, as well as Trump’s general struggle to enact any kind of policy successfully have made investors lower their expectations. We’ve even seen the dollar drop against all major currencies in recent weeks.
The situation is pretty much the opposite with the eurozone. The European Central Bank is in the midst of a massive stimulus program to encourage healthy inflation and spending. Even though the expectation was to see it continue a bit longer, the program is already paying off and surprisingly good economic data from all around Europe has prompted the ECB to admit they may start phasing out the program before the year’s end and turn to a more hawkish policy on the euro. In addition, fears of further political unrest in the EU have been calmed by Macron’s victory in the French presidential elections in April. We still have to see what would happen in the German general elections this fall, but things seem promising for Angela Merkel. It was previously feared she might not gather enough support but after a successful equal marriage rights vote last week it seems likely that she would stay in power.
So while not that much has changed for the pound itself since the Brexit vote, the dollar had reasons to drop, while the euro managed to rise, giving us the present situation.
In order to curb the negative impact from the vote, the Bank of England reduced interest rates and took measures to support the British economy through these uncertain times. Despite the pound dropping around 10% against the dollar and 13% against the euro, it appears that the GBP would not give way anymore.
Lately, investors have begun to show more optimism for the British pound sterling. This is largely due to the fact that since inflation in the United Kingdom climbed above 2%, a number of Bank of England policy makers have spoken in favor of a rate hike. Increasing interest rates would slow down inflation and boost the value of the pound. In fact, normally they would have had the grounds to implement it already. Investors believe that the only reason it hasn’t happened yet are the Brexit negotiations whose status is quite uncertain after Britain’s elections last month resulted in a hung parliament.
As usual, the situation is still unfolding. Still, if you are looking for new opportunities to trade the GBP, then watch out for news from the Bank of England, as well as anything pertaining to Brexit negotiations or the British government.
