The United Kingdom recently came out of a recession, and the next big news to come out is the latest “Strength in the British Pound” news. This has nothing to do with UK currency rates, it is about the strength of the currency in general.
The one that matters most is the fact that the UK is now a member of the European Union, which means it has to have free trade zone, and perhaps the biggest reason is the fact that this allows the US Dollar to collapse in value. A lot of investors are pulling out, as they realize that a weaker pound means a higher dollar, and vice versa. In other words, the dollar is skyrocketing while the pound is going down.
It is also a big selloff for gold. If you look at the way the world economy is structured right now, one needs to be a strong currency for the better part of one’s life to be a smart currency play. If the US Dollar is going down, that means the British Pound is also going down.
Sterling’s problem is a combination of two things. First of all, the weakness in the Euro, and the weakness in Japan are hurting the UK, but that’s only one side of the coin. Secondly, it is now having to try to keep a currency peg with the Euro, which means that even if the United Kingdom does not leave the EU, there will still be a slight weakening of the pound.
This is more than just a risk for UK investors. The Euro is in a currency war, and the Japanese are very aggressively devaluing their currency, even though they could fall at any time. Therefore, if the pound falls too much, that means that the EUR will move up.
Right now, the Pound is faring pretty well. Still, when you consider the fact that the Euro has fallen nearly half against the US Dollar in a little over a year, it is a problem. Also, when you consider that the Bank of England has raised interest rates a whole nother notch, there is some concern.
In short, the news today comes as a surprise to many who were expecting the rate decision to come out at the same time. Instead, it was given about an hour ago. When they do come out, it will be an important test for the British, as they have been given all sorts of challenges in the form of Brexit and a Greek default.
As much as we love this country, we are also aware that it has a history of a currency crisis every so often. The Chancellor of the Exchequer now has a difficult task ahead of him, which is to think about what the price is of keeping this currency strong. This means they have to think about the impact on the economy, of the devaluation of the Pound and whether that can create a monetary imbalance.
At the end of the day, all this will make him think hard about the future weakness of the Pound, which is going to create problems. After all, the currency of the United Kingdom, with its history of instability, should not be having a weak spot. That means the financial system of the country is going to be a bit tricky, and so far, it is safe to say, that it has avoided the terrible mistakes that occurred after all of the other currency collapses.
Still, they face a tough task. Since they cannot choose to devalue the currency of the country by itself, they need help from the rest of the EU, and also a global force of political will, and in that sense, the global community is involved in this particular currency issue. As long as the Greeks are not in a position to print a lot of money, and as long as the European Central Bank works to stabilize the exchange rate, the United Kingdom can survive.
However, as I said, this is something that is not under their control, and one has to wonder what this means for the Euro, and the upcoming election in Greece. June.
