As the Euro heads for parity with the US dollar on the back of a double whammy of imminent core interest rate rises in the US and the introduction of Quantitative Easing (QE) in the Eurozone, the Pound Sterling against the Greenback (GBPUSD pair) is collapsing in sympathy. The tentative reversal of the recent dominant downtrend in this pair, which we commented on here, is now well and truly blown out of the water.
The Eurozone is indeed the most important market for Britain and this alone would justify the Pound mimicking the Single Currency. But there is another, related issue on the table, too. This is the prospect of a referendum in the UK on membership of the European Union itself, which is looking like a real prospect after the general election in a few short weeks’ time.
There are two events on Wednesday of this week that will have a major bearing on the fate of Sterling: the release of the minutes of the last Bank of England monetary policy meeting in the morning GMT and the Monetary Policy Statement and press conference from the FOMC in the US in the evening (also in GMT terms). Each of these will be closely parsed for indications of how close one or other, or both, of these central banks are to raising core interest rates. Any suggestion of a furtherance of interest rate differentials between the two jurisdictions will impact strongly on the exchange rate.
Vince Cable spells out EU membership fears
The very appropriately named British government Secretary of State for Business, Vince Cable (GBPUSD was the first currency pair to be exchanged electronically, in the time when this had to happen via a cable under the Atlantic. As a result of this, Foreign Exchange dealers gave this pair the sobriquet “Cable”. It is still called that in Forex circles to this day), has pointed out that even if a referendum is held and the result is in favour of remaining in the EU, but is only marginally so, business confidence will still be irreparably shattered. His warning can only act to the further detriment of the currency, to compound the uncertainty brought on by the fact that a general election in the UK is so close..