More Losses for Pound and a Weak Q4 Forecasted
The start of October saw even more historic lows for the British pound. However, the bad news doesn’t end there, and more losses are forecasted for the final quarter of 2016.
As such, pounds sterling is under notable (and mounting) pressure, particularly from the euro. Recently, it reached a 1:1 exchange rate in some airports, and its prospects show no signs of changing. So, where will the currency go from here?
The Pound’s Poor Q3: The Brexit Affect
Currency traders continue to sell off the pound in huge numbers. However, with a fear that Britain may get a poor deal from leaving the EU and the impending Brexit negotiations, there are fears that the currency could be set to slide even further.
The Prime Minister, Theresa May, recently announced that the UK will trigger Article 50 of the Lisbon Treaty by the end of March 2017. However, rather than reassuring the markets, the move triggered a sell-off from traders.
After enacting Article 50, Britain will have two years to negotiate its position in leaving the EU. This is a period of time that some people believe simply isn’t long enough, and it’s this uncertainty that is creating negative market sentiment.
Of course much of the uncertainty also stems from not really knowing what the British people or the British government actually want from Brexit.
Opinion is divided among the British people about whether the UK should retain a member of the single market at all costs. However, with many people who voted ‘leave’ citing immigration as their main concern, it appears that free movement of people will become a red line. Heads of EU states have long argued that members cannot be members of the single market without free movement of people, which has long been a cornerstone of the EU project.
However, without single market access, tariffs would have to be imposed on UK imports, which would have a negative effect on economic growth over the coming years. As a result, the forecasts remain extremely negative; something which is reflected in the market analysis.
Q4: Is Worse Still to Come?
Analysts predict a rocky future for the pound over the coming months. It may be the case that we’ve seen the worst of the volatility for the pound, but many believe we will see further falls, potentially to the 1.11 level against the euro. At some airports, the GBP/EUR rate has been 1:1 and some analysts are predicting that this could become available on the high street, but only in a worst case Brexit scenario where the market completely loses confidence.
At present, there seems to be little to no risk of that, particularly thanks to strong economic data that has bolstered the market. It’s still too early to describe the pound as ‘bullish’, but much of the negative news could now be out of the way.
However, there are still a number of triggers in the market, chiefly the release of Q3 and Q4 data, as well as the possibility of further Bank of England interest rate cuts.
So, the advice for people trading the pound is to monitor their forex trading platforms closely. It may be that the pound is now close to finding a base, but further losses are forecast by many in Q4. As such, the pound isn’t the best investment now in your portfolio. Or, if you have it, you should look to diversify your portfolio as much as possible to navigate the associated risk. Keep an eye on the economic data to monitor this over the coming weeks to see how this sensitive situation develops.