The British Pound (GBP) is on a bit of a comeback today. Since the collapse of the global financial system last year the currency has continued to climb in value. This in turn has increased the purchasing power of British goods and services – for example the lower cost of imported goods has made imported goods cheaper to purchase.
However this rebound in the pound comes at a time when the global financial markets are in turmoil. This has led to a significant fall in the value of the pound and an increased risk of inflation. This is particularly worrying for the consumer and is leading many economists to warn that the economic outlook is looking gloomy. There are some reasons for this; Britain’s economy is not in a depressed state, but the weakness in Europe has caused a sharp increase in the demand for manufactured products in the UK.
In terms of employment there are some signs that things may be getting a little better, as the weak Euro continues to help the UK economy and inflation picks up a little from its record low. Despite this, however, there are still a number of unemployed people across the UK and it is estimated that around half a million people have lost their jobs.
Latest: GBP/USD Shrugs Off UK Employment Data, Focus No | unemployment rate} Meanwhile the unemployment rate has increased to a record high of almost 8%. This comes at a time when wage growth is very weak and inflation is rising. The pound, therefore, may not be able to recover its recent level, or hold it at that level for long.
Latest: GBP/USD Shrugs Off UK Employment Data, Focus No | euro crisis} So if we take all of this into account, then the currency markets are not necessarily betting on the euro crisis getting any better. There is still a lot of uncertainty over how things will turn out and many people, including the Bank of England governor, Mark Carney, are pointing to the need for action to boost growth.
So if the pound is holding or even recovering its current level then it is likely that the Bank will cut interest rates, which would lead to more money being put back into the economy through the borrowing and spending process. It is also possible that the Bank could raise interest rates again, which would send the pound higher and the weaker.
Latest: GBP/USD Shrugs Off UK Employment Data, Focus No | current level} This scenario is not without risks, but it is also worth remembering that there is always a chance the UK will end up with less money in the economy because of the higher spending by the public, and so an increase in the government deficit.
But with inflation rising and unemployment at record highs and there not really being much evidence of growth, there is little room for the Bank to cut interest rates further and the situation looks set to remain the same. The only way forward is for the pound to fall further in value and the Bank to start cutting rates to support growth and hopefully bring down inflation, especially if the Euro crisis continues to escalate.
Latest: GBP/USD Shrugs Off UK Employment Data, Focus No | currency markets} If the pound continues to hold at a level of around $1.40 this could mean that the currency markets think that the worst is behind us and the UK economy is going to begin to pick up again, which would cause more of an upward pressure on the currency. However, if we see an unexpected change in the government budget in either May or the next general election, then we could be in for some more bad news on the currency markets.
Latest: GBP/USD Shrugs Off UK Employment Data, Focus No | UK Government Needs Answers On Budget Plans For Growth} If a new government is formed soon then there may be a change in the Government’s approach to fiscal policy, which could affect the pound. For example it is very likely that a pro-growth Budget is on the cards and that the Government will have a stronger hand in budgeting, which could make it harder for the Chancellor to maintain a higher rate of interest and drive up the currency even more.