Why is Pound Sterling (GBP) Currently being a Complete Basket Case?

February 10, 2016 - Written by James Fuller

STORY LINK Why is Pound Sterling (GBP) Currently being a Complete Basket Case?

GBP/EUR Exchange Rate Dropped to Lowest Level since December 2014

The Pound Sterling (currency : GBP) slumped to its lowest level against the euro (currency : EUR) since December 2014 yesterday, with the pair touching 1.2738 during the middle part of the European session.

The threats to the Pound, of which there are currently many, are well known; Royal Bank of Scotland (LON : RBS) recently published a report suggesting that there is a 35% chance that UK voters will decide to leave the European Union at the upcoming referendum, (now expected to take place before the end of Summer), with the issue of immigration continuing to be one of the key points of contention in the debate.

However, yesterday’s session brought the release of new information from a raft of other investment banks which painted an even bleaker picture for the Pound. Svenska Handelsbanken AB predicts that UK voters will decide to keep Britain in the European Union, but in spite of this it forecasts that the Pound will lose 17% of its value before the year-end. Three other investment banks forecast that the Pound will lose almost 10% of its value across the board before 2017 is here.

Britain's Imbalanced Real Economy Provoking GBP Volatility

So, why is Sterling considered such a basket case? Yesterday’s 2015 trade figures for the UK economy give some indication of the drastic imbalance in Britain’s real economy, revealing a widening trade deficit in Q4 to over -£10 billion as well as a record trade gap of a startling £125bn last year.

The Office of National Statistics, which published the data, warned investors that the dire import / export data may cause a downward revision to the final version of its Q4 Gross Domestic Product data – likely to be a key driver for Sterling during the middle part of the year.

Low Oil Prices Continue to Weigh on UK Inflation

Another major drag for the UK unit is Oil. Go-ahead comments from Bank of England Mark Carney during the middle part of last year led investors to believe that UK interest rates would be heading Northwards ‘around the turn of the year’. The sharp drop in global oil prices which has followed has caused continued subdued inflation in the UK and the prospect of a tightening of policy from the BoE has therefore receded.

With oil prices falling again yesterday, and with many oil insiders predicting another 13-year low for Crude sooner rather than later, the chances of a UK interest rate hike in the next 12 months is considered minimal. For this reason, the forecast for the Pound Sterling is also NEGATIVE.

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TAGS: Pound Euro Forecasts Pound Sterling Forecasts