This week has been another week of surprises for the Pound and a reminder that, while Brexit has been a strong influencing factor on its value in recent months, it certainly isn’t the only one. Events in the Netherlands and the USA gave the Pound a boost against the Euro and the Dollar respectively, while the Bank of England has surprised markets with a more positive message than had been predicted, providing further gains for Sterling against both currencies.
In the run up to the Dutch elections, there was a lot of uncertainty about which way the vote would go. Geert Wilders, sometimes described as the Dutch equivalent of Donald Trump, had appeared to be attracting support on a platform of anti-immigration and anti-EU policies. He described the votes for Brexit and Trump as a “patriotic spring” that he wanted to continue in Europe, ahead of elections this year in France and Germany.
Prior to the elections, the Pound gained against the Euro as Wilders appeared to be gaining traction and it was uncertain which way the vote would go. Initial results showing Wilders had done less well than expected provided investors with some relief, lifting the Euro. However, once the results were analysed more closely, an underlying trend of fragmentation was revealed, which could potentially be a concern for the Euro going forward, particularly if similar trends are repeated in the French elections in May, and Germany later in the year.
Federal Reserve announcement
The Pound then received a boost against the Dollar following the Federal Reserve’s announcement yesterday regarding rates. As expected, they lifted rates by 0.25%, only the third increase since the 2008 Financial Crisis. However, their language around the potential for future increases was cautious. They described their planned approach as “gradual”, with the central bank’s chief, Janet Yellen, confirming that they plan to stick to their forecast of two more hikes in 2017, followed by three in 2018.
The Fed may feel this cautious approach is justified to avoid causing upset in the financial markets or reducing consumer spending. However, there are concerns that the approach could cause issues in future if Trump does pursue his plans to cut tax and increase spending. Their approach appears to have disappointed some investors, as the Dollar weakened against the Pound and other major currencies.
Bank of England announcement
Meanwhile, the Bank of England surprised markets today with a more positive message than was expected. While UK interest rates were kept unchanged at 0.25%, the vote was not unanimous for the first time since last July. There is now speculation that the Bank of England might be closer to raising interest rates than had previously been expected.
Kristin Forbes, who voted to increased rates, suggested that inflation is “rising quickly and was likely to remain above target for at least three years”. Previously, the committee had suggested that this on its own would not be enough to increase interest rates, if inflation was purely due to the recent weakening of Sterling. However, today’s notes suggest that an increase in inflation, combined with some positive economic news, could be enough for them to change their current approach.
This surprise gave another boost to the Pound, gaining 0.6% against the Dollar and 0.7% against the Euro.
What’s next for the Pound?
The next significant event for the Pound is most likely to arise from Theresa May triggering Article 50, which is currently expected to take place in the final week of March. While the event itself may not have a large impact due to it being well telegraphed in advance, the response from the EU and the tone of negotiations are expected to create some volatility for Sterling in the coming weeks and months. The Scottish National Party’s demand for a second Scottish Referendum could also add to this uncertainty.
As we have previously discussed and as this week has shown, it is not just domestic events that will influence the Pound. Speculation remains high about what could happen in the upcoming French and German elections, both of which have potential to influence the value of the Pound against the Euro. Events in the US are also of great importance as Donald Trump seeks to boost the American economy through lower taxes and increased spending.
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