The recent developments across global markets have market participants wondering what is going on in the currency markets. Market participants should be worried about what the Central Bank of England is aiming to do with its current monetary policies. Most recently, the United Kingdom’s decision to leave the European Union (EU) should have currency traders and investors on edge. Consequently, you should keep an eye out on GBP currency pairs, particularly, EUR/GBP, USD/GBP and AUD/GBP.
UK Leaving the EU Shook Markets
The United Kingdom’s decision to leave the EU, which was an unpredictable event, shocked the foreign exchange and financial markets. The Brexit event caused the GBP to fall against all major currencies and surprised many market participants. This event complicated economies further, specifically those with trade agreements with the UK and countries surrounding the UK.
After the Brexit event, the GBP fell from an exchange rate of 1.4893 to 1.3681, when measured against the U.S. dollar between June 23, 2016 and June 24, 2016, over an 8% drop in just one trading day. Moreover, the GBP fell from 1.3091 to 1.2391, when measured against the euro, a 5.37% drop. Additionally, the GBP fell from 1.9617 to 1.8309, when measured against the Australian dollar, a 6.67% drop.
Will the GBP Bounce?
Some analysts at leading global institutional banks believe that the British pound is oversold and could rise by 3% against the euro. Morgan Stanley stated, “Against this background, the oversold but still yielding GBP may bounce back. In the short term, GBP may well be the best performing G10 currency, especially offering recovery potential against the JPY.”
However, with the Bank of England implementing its new quantitative easing program and interest rate cut, the central bank’s aim is quite clear. The central Bank of England is comfortable with the GBP at its current levels and is not worried about strengthening the GBP.
Central Bank of England’s Monetary Policies
In early August 2016, the Bank of England stated that it would cut its benchmark interest rate to its lowest level in history. The interest rate cut aimed to stimulate the British economy after the EU referendum vote. The Central Bank of England Governor, Mark J. Carney, noted that the Monetary Policy Committee could cut rates further in 2016. However, Carney has ruled out a negative interest rate policy. The Central Bank of England’s Monetary Policy Committee voted to lower the benchmark rate to 0.25%, the lowest level in the central bank’s 322-year history.
Moreover, the Bank of England extended its quantitative easing program, in which it prints money to purchase government bonds. The primary objective of the QE program is to bring down the government bond yields and push investors to opt for riskier assets. In turn, this should boost the British economy. This move will increase the money supply, and consequently, decrease the value of GBP.
What a Weaker GBP Means for Expatriates
One sector that is struggling with the weakened British pound is Eurozone-based expatriates, who need to use their pounds to buy in Euros. British expatriates will suffer since their British pounds will buy fewer euros. British expatriates typically like to settle in countries include in the EU, such as Spain, Ireland and France. Consequently, expatriates who are paid in pounds will be able to buy and invest less. Moreover, their retirement funds will suffer too. However, those who are paid in euros do not have to worry as much. Now those who are worried about transferring money in pounds to euros or other countries over seas could minimize some of their costs and take off some pressure by using MoneyTransferComparison.
In early September, the Pound Sterling was under pressure due to Carney’s statements at the inflation report hearings. On September 7, 2016, the GBP/EUR exchange rate was 1.1895. The Bank of England’s recent monetary policy changes should cause the GBP/EUR, GBP/USD and GBP/AUD to weaken further over the short- and medium-term if the Central Bank of England continues its QE program and low interest rate policy.