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Home Insights & Advice The effect on the pound as life begins to return to normal

The effect on the pound as life begins to return to normal

by John Saunders

The coronavirus lockdown has had a profound effect on almost every walk of life. From the range of food on the shelves to the impact on job security and finances, barely anything has been left untouched by the pandemic. But one question that foreign exchange traders will no doubt be asking is what effect the return to normal business life will have on the value of the pound.

A global trend

Before delving into the nitty-gritty of what factors can affect the pound’s performance in the forex market, it is worth first thinking about the fact that most major economies are in the process of responding to the pandemic – and many are having similar experiences. Unemployment figures have spiked in lots of nations, for example, but are starting to show signs of dropping now that businesses are reopening. So a note of caution should be sounded before reading too deeply into the reopening in Britain.

There are, of course, differences between nations as they respond to the pandemic. The collaboration between France and Germany to deliver a package of aid, for example, has pushed up the single European currency because it is indicative of a powerful trans-national response. But by and large, the advanced economies of the world are responding together to what is essentially a global threat – and any intervention of the British government should always be considered in the context of the wider world.

The macroeconomic context

There is, of course, no sure-fire way to predict the outcome of the forex markets. If there were, there would be no point in trading as the outcomes would all already be known! But it is possible to identify economic trends and flashpoints which can have an impact on the forex markets, and then apply this specifically to Britain. It is the case, for example, that a rise in crucial sector-based UK indices – like manufacturing and services – could push the pound up. Other countries have seen significant increases in these indices in recent days: in the Eurozone, for example, the recent services PMI data release from Markit was accompanied by a spike in the euro’s value.

The plot thickens, however, when the responses of other economic actors – such as the Bank of England – come into play. Interest rates in Britain currently sit at a long-time low of 0.1%, and the overarching goal here is to incentivise businesses into borrowing money at cheap rates to expand and hire. If the Bank begins to conclude that this is happening at a sufficient scale, it might consider raising rates – which could have a significant impact on the pound’s value. It’s definitely wise, then, to keep up to date on the news and be ready to act when required.

Government responses

It is also essential to consider what steps the government is taking as the economy reopens. On the face of it, the reopening of business will be accompanied by some headline scaling down in expenditure – especially when it comes to the winding down of the furlough scheme. It may well be too early to tell what effect this will have on the pound given that the currency shot up when Chancellor Rishi Sunak unveiled an extension to the furlough scheme. The gradual ending of support packages could cause the currency to wobble if the underlying health of the economy does not improve in tandem with the changes.

And it is also worth noting that the UK is not in a particularly unstable period politically. With Boris Johnson’s government enjoying a large majority and with no requirement for a general election to be held for several years, it is unlikely that the country will descend into the sort of parliamentary chaos seen in the run-up to last year’s vote. Given that political instability can be a key catalyst of problems in the foreign exchange markets, many traders in sterling will be relieved that this is at least one problem they do not have to worry about.

All sorts of factors can affect the value of the pound, and the impact of the reopening of the British economy might not be immediately apparent. What is clear, however, is that traders need to keep an eye on all sorts of things: from the actions of the Bank of England to whether or not the government alters its support reduction plans as business returns, there’s plenty to keep watch over.

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