Reviewing the Pound’s decline
Taking a quick look at the causes for the pound’s February decline (aside from Brexit fears) will give us a strong context for its recent rally.
Mixed UK inflation data
UK inflation data was one of the initial catalysts of the Pound’s decline. Analysts had hoped for positive inflation trends, but instead the core Consumer Price Index saw a larger dip than expected. Baseline inflation stood at 0.3%, well short of the Bank of England’s 2% target.
UK employment rates
We also saw mixed data on UK employment. The International Labour Organisation (ILO) Unemployment Rate failed to drop from 5.1% to 5.0%. Wage growth was also disappointing, indicating that the BoE will leave interest rates as they are for the near future.
What Brexit could do to the Pound value
Then, of course, there’s the main factor of the Brexit referendum - which will decide whether Britain remains in the Eurozone. High profile analysts have forecast the Pound to weaken by 15% to 20% if Brexit happens. The proposed exit is increasingly unlikely, as several countries will almost certainly oppose the reforms, but the possibility remains, and with it the volatility. Thus, the Pound has seen significant losses, leading to February’s low.
Behind its recovery
But in spite of continued Brexit fears, March has seen the Pound make a slight recovery rather than a continued decline. There are a few possible reasons for this.
Billions flooded into UK banks
Reports say that BoE Governor Mark Carney is flooding UK banks with billions of Pounds in order to stave off Brexit fears. The move, although controversial, has been used before. Specifically, during the Scottish Independence referendum, and the 2008 Eurozone crisis. Carney has been vocal in his support of remaining in the Eurozone, which he says is necessary for business and economic stability.
Positive UK retail sales
British economic data has produced better-than-anticipated results. Government borrowing and retail sales data was particularly significant, showing the largest January surplus since 2008. January’s Retail Sales advanced by 2.3% and 5.2% on the month and year respectively.
European economic data
European economic data, however, produced disappointing results. January’s German Producer Price Index, in particular, declined further than expected.
This did not, though, lead to heavy Euro depreciation, mainly due to trader risk-aversion and heightened demand for financier assets.
ECB policy review
However, persistently weak Eurozone inflation has caused the European Central Bank to review policies in order to reach heightened expectations, which is now causing a dip in the value of the Euro.
Uncertainty remains
Yet, in spite of the Pound’s recent recovery, many economists are concerned that its current stability is more like a coiled spring, which could react in one way or another. The Brexit referendum is still months away, which almost certainly means continued volatility. And, with many other factors influencing the GBP/EUR value, it is difficult to predict the next turn the Pound will take.
With volatility to continue throughout the next few months, it will be increasingly difficult to rely on the usual indicators. While the Pound has shown positive growth, the recovery could turn out to be a temporary blip.
