Sterling has fallen nearly 3% this month against the Euro, and market positioning data shows speculators making big bets on a further fall.
Yesterday’s inflation data was one in a long line of sterling-negative data releases, amid fears that the Bank of England will next month continue to increase the “quantitative easing” asset-buying programme. Each time it has done this in the past, the Pound has weakened significantly.
With the UK also expected to lag behind the USA, the European Central Bank and other countries in raising interest rates, some in the market say sterling is at risk of becoming a funding currency for the “carry” trade, in which investors use low-yielding currencies to buy assets in higher-yielding ones. This would almost certainly drive it lower still.
A CEBR (Centre for Economics and Business Research) report released this week, predicts the exchange rate for buying Euros to possibly fall below £1 = €1, and the US Dollar rate to drop down to £1 = $1.40, in the coming months. This would be amid a backdrop of low interest rates, tax rises, and spending cuts in the UK economy.
Sterling yesterday hit new multi-decade lows against the Australian Dollar, where the Reserve Bank has already started a new cycle of interest rate rises, and other central banks are likely to follow suit long before the Bank of England.
“For anybody who is using sterling to fund overseas money transfers, these are worrying times”, says Aidan Kilvington, analyst at brokers Currency Index Ltd. “Businesses with invoices to pay in a foreign currency, or individuals who are buying overseas property, should consider fixing an exchange rate now, as optimism in these markets can be expensive”.
The all-time low for Euro exchange rates was in January, whe
