Firstly ParityFX wishes all those who lost loved ones in Brussels our heartfelt condolences
GBPUSD playing silly games again, with the EU referendum adding to the GBP’s woes. Moody’s rating agency concluded that the economic costs of Britain exiting the European Union would “outweigh the potential benefits” and may put the UK’s Aa1 credit rating at risk. We all know the risks and downside to leaving the EU and more and more respectable agencies are jumping on the band waggon. However the vote by the people is a different ball game and people sometimes do not look at the economic ramifications to BREXIT. Like Greece the fallout will be horrible and unknown (other the GBP getting routed in the markets). Surely the Scottish referendum was proof enough that these decisions have long lasting effects on the UK economy. We have never recovered from the latter referendum and the EU one will probably have the same effect. So buckle up because between now and June you can expect the GBP to be hammered vs the USD and EUR. There will simply be no respite.
Ex-BoE’s Governor King said the ECB and the BoJ are essentially trying to push down the values of their respective currencies with the use of negative interest rates. “There are clearly limits” to the effectiveness of negative rates, King said Monday in a Bloomberg Television interview. “I think you can see with Japan and the euro area that in essence, the central banks are trying to push down the exchange rate. Most countries in the world could say now, ‘If only the rest of the world was growing normally, we’d be fine. But since it isn’t, we aren’t. What’s left? Push down the exchange rate.’” Pretty worrying times ahead and so much for the end to the 2008 financial crisis. One door closes and another opens. Most global economies use their exchange rates to “manipulate” their balance sheets and we know for certain the ECB would be (further) delighted with a weaker EUR. It makes home grown good more attractive and boosts the current account. Having said that, actually making it happen is not as simple as it sounds. Though Central banks are good at “hiding” their intervention. Down the line, despite the FED finally admitting what we have been saying for weeks now that they will delay rate hikes (max 2 in 2016 from 4), the USD is still likely to hit PARITY vs the EUR. It is simply unstoppable.
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