At Smart Currency Exchange, we’re often asked the same question, will the pound go up or down? The short answer is that even as traders who eat, drink and sleep currency and the fate of the pound, we have very little idea.
No-one does. The movements of GBP/EUR or GBP/USD or any other currency pair are based on a complex interplay of economic data and political news. Since we don’t know what tomorrow holds it is impossible to predict with any great confidence what will happen next (and even if we did have a crystal ball on future events, currencies can still take you by surprise.
But… don’t click off the page just yet, because I can certainly give you a few clues as to the factors that will affect the performance of sterling. Look out for these over the weeks ahead.
Negotiators from the UK and EU have been meeting online throughout the Covid crisis. The pound has waxed and waned over the lockdown period largely based on whether the currency markets think that the UK will finally crash out in a few months with no deal (negative for sterling) or with a trade deal (positive for sterling).
For a while we were all focused on the 30 June deadline for asking for an extension. However, the UK side’s insistence that there will be no transition period extension sought – or accepted if offered – has reduced that date’s importance.
Although not seeking an extension has been met with incredulity in some quarters, could it work in pressurising the EU to do a deal? Watch out for any improvement in the “noise” coming from the Brexit talks, or a last minute change of heart and request for an extension.
The health crisis
This week we heard two very different pieces of news. The first was that New Zealand, which had successfully rid itself of the disease, had been infected again by two British arrivals. Furious, New Zealand’s Prime Minister called in the army to take over the quarantine system. This at a time when we hope to see air bridges opening up from the UK to our favourite destinations like Cyprus, Portugal and Greece that also locked down early and kept Covid at bay.
But later on Tuesday we heard that a British medical team is the first in the world to find a successful treatment for Covid-19.
At this time, especially with Brexit, you can see that we have a complicated relationship with our friends in Europe and the world beyond!
If the threat of the second wave can be headed off by better treatments, there will be less fear of a second wave and the world should start returning top normal. Although improved health will benefit every economy, it should still support sterling.
We still get the usual economic data releases, on retail spending, unemployment etc, but much of it seems meaningless right now. We have to look at long-term prospects, and the third crucial factor in the success of sterling is how the UK recovers from the lockdown, recession and huge public expenditure.
The currency markets will be looking for any clue that the UK economy is heading for a V-shaped, rapid recovery, a U-shaped delayed recovery, or an L-shaped disaster.
Allied to this, however, is the stock market. The pound generally follows global stock markets, and if these start to rise, so should sterling.