Pound Retreats – Could Fall to 1.2500 by the End of the Month!
The bounce back from the recent sell-off has been shocking. Even after a historic run of stellar performances, the pound has retreated to two-month lows against the dollar. It’s looking like the Brexit fears that sent the currency spiraling out of our hands last month are turning out to be over-blown. The pound has performed much better than many expected and there are reasons to think that it could remain at current lows for the remainder of the year. Let’s take a look at what the pound’s current state of mind can tell us about the future.
What Has Driven the Pound Down?
The fall in the pound has been triggered by a number of factors, which have come together to create an extremely volatile market environment.
In order to make an assessment of what has driven the pound down, we need to get a clear picture of what is happening in the rest of the world. In particular, we need to know what has happened to the value of the British Pound Sterling.
One of the main reasons the pound has lost value is because the strength of the pound has gone down against the dollar. This is because the value of the British pound has gone down in terms of the dollar as well as the euro.
Another reason the pound has declined is because of the strength of the British pound against other major currencies like the euro and the Japanese Yen. The pound has also lost value against the pound sterling, which means that sterling has lost value against the dollar as well as the euro.
Pound Retreat Has Been Overstated
The pound’s recent retreat has also been overstated. The UK’s recovery from the financial crisis was one of the strongest in the world and it has the highest standard of living of all major economies. With strong growth, the government has been able to reduce its budget deficit. Its finances have been very stable in terms of the amount of tax collected and its national debt has been falling continuously for the past seven years.
The Brexit Fears Have Been Overblown
The result of the EU referendum has been widely cast as a cliff-edge decision that will have a cascading effect on the entire global economic community. However, the pound’s recent slide can be put in context by looking at the other major currencies in the world which have been affected by the same effects of an economic shock.
As can be seen in the chart below, the vast majority of the currencies that have been affected by the same shock as the UK (Brexit) have seen even steeper declines over the past six months.
The Other Factors Have Been Even More accompanimenting
The British pound has also been pressured by geopolitical factors, related to the outcome of the EU referendum. The dollar has also fallen against most major currencies as investors have become worried about the effects of a possible trade war between the US and its major partners. At the same time, the oil prices, which had supported the pound, have also plummeted.
Should You Buy the Pound?
It has been argued that the pound’s recent slide can be put into historical perspective by looking at how it has performed against other major currencies. The following table shows the performance of the British pound against various major currencies over the last 100 years.
The table shows that during the first 100 years of its existence, the British pound reached an all-time high of $1.6296 against the US dollar in October 1992. However, after that euphoric month, it has struggled to maintain its former high. As the following table shows, the pound has managed to stay above the $1.6296 level only twice more in the following 21 months.
The recent volatility in the pound has been shocking. Even after a historic run of stellar performances, the pound has retreated to two-month lows against the dollar. It’s looking like the Brexit fears that sent the currency spiraling out of our hands last month are turning out to be overblown. The pound has performed much better than many expected and there are reasons to think that it could remain at current lows for the remainder of the year.