Sterling Remains Weak Ahead of GDP and Cabinet Reshuffle – Key Dates Ahead of the Global Economic Confluence: Sterling continues to weaken ahead of the Global Economic Confluence. The United Kingdom has historically been the crown jewel of the British Empire, but that is no longer the case. The pound has been steadily weakening and now sits around $1.40 against the dollar. Sterling is one of the reasons the UK’s manufacturing sector is so weak, because most of its exports are products of Europe, Africa and Asia.
An election in the UK could help alleviate the market turmoil caused by a weak economy, but the PM, as well as the Chancellor of the Exchequer, have both been under pressure. Politicians are looking for a way to ease the pressure and one possible candidate is the bond market, which will likely do so by letting the UK borrow more money from the EU, but not on current account.
Monetary Policy will be another important factor in this article. It is important to note that while the US Federal Reserve has announced that it will cut interest rates in June, that this is only because of the Global Financial Crisis. The Fed could actually have done the same in 2020, when the dollar was at its lowest since 1966, which was when it was first introduced.
As discussed in the UK in 2020, there are other significant differences between the Federal Reserve and the BOE (Bank of England). The BOE’s interest rate will not be cut until after it publishes the outcome of its recent FOMC meeting. This can take weeks, perhaps even up to two weeks.
During that time, we expect the Fed to announce that it will go ahead with its proposed cuts, which will have the effect of cutting effective rates, meaning less interest income for banks. This will be followed by some interest rate hikes, which will further reduce effective rates, but in the long term, which will improve financial conditions. One key fact about these upcoming interest rate hikes, which will drive the interest rate overshoot that will eliminate the need for any monetary easing, is that the Bank of England is forecasting a low inflation, which is one of the factors that drove it to consider such an easing, and did not expect the latest crisis to last so long. The major issue for the future of the UK is its current account deficit.
To put this in perspective, the current account deficit is the difference between the value of the UK’s exports and imports, and it is currently pegged at around 8.5%. Therefore, if the deficit becomes much larger, there will be problems with UK currencies, which is not something the UK economy should have to worry about.
The outlook for the UK is positive in this sense, but there are still important risks. The global economic crisis has affected countries around the world and left them with limited access to capital markets, causing companies to cut costs and many to reduce their workforce numbers. Additionally, there is much uncertainty about the timing of the next adjustment in interest rates by the Fed, as well as possible job losses at the central bank.
When you consider all of this, you can see why the Bank of England could find itself under tremendous pressure. That is why it is not out of the question that the BOE might announce a quantitative easing program at its quarterly Monetary Policy Committee meeting, although it is still too early to know what this might entail.
You could also argue that the actions taken by the BOE are a welcome intervention in the market turbulence. But the volatility of the pound is not out of the question in the near future, despite the UK government’s efforts to ease the current account.
You should consider the fact that while there is no sign of any serious current account deficit, it is more likely that sterling will continue to weaken. The problem is not one of ‘currency strength’ or even ‘dollar strength’ and there is no easy solution to such an issue.