Global Decisions and Impact on the Pound – Pound Sterling Forecast – A quiet week on the markets?

The strength and weakness of the pound is mainly attributable to the performance of the economy in the UK. By and large when there are positive economic sentiments, the pound will gain and when the tone falls, the pound too suffers.

The pound also draws strength from the fact the UK is a safe haven.  Investors have confidence in investing in the UK because of the certainty and confidence presented to the markets by a strong government. Whilst the UK has taken a hit in recent years, London is still a financial centre and the UK with its strong international political influence is regarded as a safe place to keep money. The lack of volatility increases investors confidence in the UK and hence the pound.

The economy in the UK is heavily reliant on exports for its growth and trade, yet it remains a net importer. Which basically means we import more than we export and hence there is a cost to our economy for doing so. What is interesting is that whilst UK exports to Europe have dropped, so too have UK imports from Europe. Nevertheless there remains a deficit which is growing. From May 2012 to Ausgut 2012, the size of difference between imports and exports grew 24.4%.  Compared to June 2011 it has grown 54.4%, which is a very worrying sign. Not only is the UK buying less  from Europe, Europe is buying less from the UK. And to a greater extent.

Trade outside the EU is slightly harder to evaluate since there are so many more variables (a wider range of  countries to distort data), but it paints a similar picture. Which is that the UK is a net importer. This does not bode well for the pound in the future as ideally we want the UK’s own businesses to grow and flourish rather than rely on overseas countries for our goods and services.

International Politics and Economic policies can also have an impact on sterling exchange rates. When buying or selling a foreign currency, an awareness of all the issues surrounding that currency are useful to know in order to get the best exchange rate. Ongoing events in Europe are having a big impact on the pound as the international response to Europe is affecting cash flows and trade with the UK. The UK’s main exports will only flourish when there is stronger international demand for those goods and services.

It looks like Europe is about to enter a recession and we have already had many talks of Chinese and Japanese slowdowns. This is bad news for the pound because a reduced lack of demand from these countries will affect Europe, and the UK will in turn be affected since we rely on Europe for 40% of our international trade.

There are ongoing meetings amongst Eurozone leaders and this Friday the Federal Reserve Chairman Ben Bernanke will meet other members of the Federal Reserve Bank to discuss economic policy, namely the extension of more QE in the US. The outcome of these meetings will have an effect on global confidence which will affect inflows into the pound. The outcome of these decisions will have a big effect on the most traded currency pair EURUSD and the cash flows in and out of these currencies will affect GBPEUR and GBPUSD.

Attitudes to risk will also be shaped by the outcomes of these meetings and currencies like the Aussie, Kiwi and Canadian Dollar will also be affected.

So whilst it is a quiet week on the economic data front, we could yet see much more movement on all exchange rates. For a full risk overview of all of the events affecting your currency transfers, plus a commercial exchange rate, please feel free to contact the author Jonathan Watson on [email protected] or call 01494 787 478 asking to speak to Jonathan.