By Andy Scott, premier account manager at currency specialist HiFX
Sterling suffered its worst monthly loss against the US Dollar during May since September last year, falling by nearly 10 cents or 6% from the start of the month with barely a pause for breath.
The Dollar had so much momentum behind it that there seemed to be no one on the other side of the trade, resulting in technical levels of support giving way with ease.
Whilst some were surprised by the aggressiveness of the move, there are very similar reasons and catalysts behind this move and the one back in September. The first is a significant change in expectations on monetary policy by the Bank of England.
For some reason - best known to those who thought it - many forecasters and analysts reached the view that the Bank of England was finished with quantitative easing and was becoming more concerned with above target inflation, putting them at least on a neutral policy stance. But cast your mind back to October when inflation was over 5%, they eased policy by injecting another £75 billion through quantitative easing. Does this sound like a central bank concerned with above target inflation?
The second is a run of weak economic data in the UK which supports the argument for further monetary easing, particularly for the IMF who very recently called on the bank to print more money and cut interest rates further. Data in the US has been significantly better with the economy there growing rather than contracting, making it less likely the Federal Reserve will ease policy.
Finally, and some would argue most importantly, the ongoing mess in the Euro zone has investors scrambling to buy only the safest assets and in the currency world, the Dollar is king. With Europe as divided as ever over which plaster to stick over the Spanish banking problem and what to do should Greece’s new government reject the austerity, it seems unlikely the current ‘risk off’ environment will end soon. With our largest trading partner in recession we could be in for a very tough year with few signs of recovery, making monetary easing all the more likely and increasing risk of the Pound dropping below 1.50.
Join us on