The Sterling’s Spike Excites Speculators
The Cable (GBP/USD) has been trading in a slightly bullish range this week. That the GBP/USD managed to break through the critical 1.3000 resistance level is impressive, but not significant. For the year to date, the GBP is slightly up on the USD, rising from 1.23 to 1.30. It reached a high of 1.32 on 3 August 2017, but has struggled to maintain momentum at that level.
The GBP/USD pair is unlikely to move dramatically over time, given weakness in the USD, and weakness in the GBP. The Fed recently announced that it would not be raising interest rates anytime soon, owing to inflation projections in the US economy. This naturally lends itself to a stronger cable. Even with weakness in the UK services sector, the GBP still manages to gain an edge over the greenback.
GBP Strengthens Against Greenback but Weakness Persists
The recent rise in the value of the GBP against the USD is heartening for pound bulls. It indicates that UK businesses and consumers will be able to purchase more dollar-denominated commodities, and US goods and services. However, it also means that exports will take a hit. A more pressing concern for Britain is what’s currently going on with the GBP and the EUR.
In the corridors of power, economists are carefully eyeing the GBP/EUR pair for signs that it’ll move towards parity. This has never happened, and if it does it’ll have far-reaching implications for the GBP. For starters, all European imports will become significantly more expensive. But, European purchases of UK goods and services will rise, and this will invariably boost travel and tourism to the UK.
Currently, the GBP/EUR currency pair is trading at 1.0939. The sterling started the year at 1.17 to the euro, and has steadily depreciated to its current level. Note that the 52-week low of the GBP/EUR is 1.0745, and the 52-week high is 1.2042. The strength of the EUR is based largely on the performance of the German economy.
Recently, ECB President Mario Draghi announced that he may be looking at tapering QE policy as the European economy continues to strengthen. This dramatic announcement will have far-reaching implications on the EUR’s cross-currency trading rates with the USD and the GBP. For starters, the EUR is now trading at its best level against the USD in 2.5 years, and many leading economists and analysts expect it to continue strengthening.
ECB to Reverse Course and Slow Down Stimulus
The European Central Bank (ECB) has been stimulating the EU economy to the tune of €60 billion per month. This massive injection into the European economy facilitates cheap lending and accelerates the velocity flow of money. With interest rates at unusually low levels, investors and consumers continue to benefit from cheap credit.
Now that the ECB chief believes that it may be time to reverse course, currency traders are going long on the EUR, and dumping competing currencies like the USD and the GBP. There are many reasons why the EUR is strengthening recently, notably the election results in France and elsewhere.
Britain remains the only anomaly in the European unity experiment, since even the Grexit failed to gain traction. The USD remains locked in a negative spiral, owing to the inability of the Trump administration to pass any substantive legislation on tax reform, immigration policy, healthcare, etc. The debt ceiling will need to be raised to accommodate Texas and Louisiana which suffered tremendously after the recent storms. These political pressures add to the current economic burden.
A stronger EUR does not bode well for hitting the inflationary targets in Europe. Since foreign goods are now relatively cheaper for Europeans, this does not necessarily mean that wages will rise and that productivity will increase. The ECB continues to target an inflation rate of 2%, but inflation levels remain well beneath that. While European importers may be licking their lips, exporters will be licking their wounds.
How do you feel a stronger EUR will affect Britons? Which currency will gain the ascendancy between the GBP and the USD, given the pressures that both countries are currently under?
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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 iForexTrader.co.uk.