You could be wondering…“What the heck is happening to Sterling?!?!”
Those watching the GBP/EUR exchange rate over the past few months have probably noticed a rollercoaster of highs and lows. Just last November, the interbank rate for one pound was sitting comfortably at €1.43. A mere 12 weeks later, the pound was struggling to stay at €1.28, with forecasts predicting doom and gloom for the short term.
So what is the cause of such instability and why have we suddenly been seeing the pound at its lowest level since late 2014?
Brexit Anxiety – The debate about Britain exiting the European Union is causing a big headache for the pound. A growing number of UK voters are supporting independence from the EU, while business and (some) government leaders favor the UK remaining as a member state.
Is a referendum on the cards? Prime Minister David Cameron heads to the European Council this month to negotiate reforms in Britain’s EU membership. Can he gain concessions to appease an anxious public?
European Angst – The flip side, of course, is that the European economy continues to sail on ever-changing waters. With quantitative easing as its rudder, the EU has set a slow and steady course out of rough seas and back to safe harbor of growth.
In early March, attention will be focused on the European Central Bank’s monetary policy meeting. An extension of the controversial intervention could indicate the market is not improving as much as financial markets would like, in which case, we might see a slight weakening of the euro once again.
Global Hijinx – With a global market slowdown, falling prices of commodities, seemingly bottomless oil prices, refugees straining resources and a rambunctious American presidential election, even the experts are finding it difficult to predict the future. The prospect of a 2016 interest rate hike in the UK is likely to evaporate into thin air. In fact, the Chancellor of the Exchequer has advised that the UK economy is headed for a difficult year…and it seems hard to argue this sentiment.
So, where does the GBP/EUR pairing go from here? After enjoying high interbank rates last November, mumblings in the world of foreign exchange tended to forecast improved rates by March. However, since the turn of the year, there has been little respite for Sterling, and we have seen it slip further and further down. Until there are some firm decisions with regard to the Brexit debate, and an improvement, or at the very least positive language, surrounding the issue of a UK interest rate rise, the potential for volatility is inevitable.
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This article was written on the 16th of February, 2016.