The UK economy isn’t doing so well but not all forces are against the pound.
Here are the factors moving sterling:
- An official recession was confirmed after a second quarter of contraction in Q1. Q2 doesn’t seem to be much better.
- Unemployment refuses to fall, and the weaker demand from Europe hurts the economy.
- Lower inflation: The good news for Brits is that inflation is finally down, but this isn’t good news for the value of the pound, as it paves the road for more quantitative easing.
- European flows: While lower demand from the continent is bad for the economy, the debt crisis sends money into British bonds and also into property in London. Prices in the British capital are too close to pre-crisis highs and bubble could emerge there.
- Olympic games: London 2012 begins on July 27th. Expenditure will probably rise towards the games and during them, boosting the economy and consumer confidence. This is a positive factor.
On the background of a weakening economy, the Bank of England is expected to launch more QE. This decision was very close in June’s meeting. A majority in the MPC voted against the will of Governor Mervyn King – a rare event.
This article is part of the Forex Monthly Outlook. You can download it by joining the newsletter in the form below, which appears on any article on Forex Crunch.
It’s important to note that the effect of British QE on the value of the pound has been somewhat short-lived in the past.
The ongoing recession and more QE will likely weigh on the pound, while the Olympic games and European flows could help the currency.
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