King Stops GBP/USD Decline but for How Long?

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King Stops GBP/USD Decline but for How Long?

King Stops GBP/USD Decline but for How Long?



As stock markets continue to climb, so sterling continues to fall.

Nevertheless, the UK currency did receive a boost from Sir Mervyn yesterday, as he mentioned that he thought the pound had reached a fair value following months of declines.

As a result, the GBP/USD spread betting market dragged itself back above the $1.5000 mark and is up again so far this morning at $1.5140.

This only serves to remind us how some comments from a central banker can change the fortunes of a currency.

The euro saw the same thing during the summer, when Mario Draghi said that he would do all it took to save the single currency, and since then it has recovered significantly.

But in the case of sterling, Sir Mervyn has not gone as far as to say he'll 'do whatever it takes' to save the pound.

Whilst there's a chance that Scotland might devolve next year, they are still keen to keep sterling as their currency and there's not the same threat of a break-up of the United Kingdom as there is in the Eurozone.

This means that the pound doesn't actually need 'saving', however, the Governor's comments may not prevent the downward trend for long.

Continual talk of negative interest rates is meaning that the prospect is becoming more and more likely, much to the fear of savers and pensioners.

In all honesty though, we are already so close to negative interest rates that reducing them any further may not make much of a difference.

What it might do is encourage the UK to take another step towards a Japanese-style period of prolonged stagnation.

With record low interest rates, all that would be missing would be deflation, something that no economy wants to see.

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By Angus Campbell, 15 March 2013


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