Great British decline: What will it mean for the GBP?
While Britain may have escaped the clutches of recession, the portents for economic growth in the UK remain decidedly slim. Leading economists have confirmed that the nation is set for a prolonged and agonising period of recovery, which will see ‘feeble’ and ‘fragile’ growth from border to border.
So although the prolonged double-dip recession may finally be over, British citizens and business owners must prepare themselves for a period of austerity and frugal living. Forex traders are also set to be effected by the diminishing economic growth, as the GBP is no longer the source of strength it was during the first financial quarter of 2012.
The GBP and the Impact of Economic Decline
Although the GBP has fluctuated wildly as Britain has struggled to emerge from the shadows of recession, during the last three weeks it has experienced significant decline against the USD and the Euro. The forecasts for austerity and diminished consumer spending as been at the heart of this decline, as the Bank of England (BoE) recently estimated that a slow economic recovery would force families to save their disposable income and cut back on expenditure.
This has had a direct and detrimental impact on the value of the pound, which has subsequently been compounded by the further suggestions that the UK government are likely to slash public spending. In addition to this, the BoE have also pledged to keep British Interest Rates low at just 0.5% for a period of two years. This has the potential to force the value of the GBP down further, with forex investors far more likely to utilize the currency as a carry trade.
The Fortunes of the USD and the Euro
The decline of the GBP against the USD and the Euro has also been facilitated by other factors, however, some of which remain outside of UK economic control. In terms of the GBP/EUR, for example, the failure to condemn Spain to junk credit status and improved sentiment surrounding the eurozone as a whole has allowed the single currency to rally. The GBP/USD has also been trading significantly lower over the last month, although this may change with the U.S. government set to face their own fiscal cliff in the New Year.
With Greece and Germany also continuing to negotiate a financial bail out package, there is the potential for the Euro to rally even further during the final financial quarter. Conversely, the GBP is unlikely to experience any significant growth any time soon, especially as consumer and public spending becomes considerably reduced. For forex traders in particular it is a time to be watchful, and pay specific attention to the wider economy before executing their transactions.
If you are keen to learn further information about the forex market try visiting http://www.alpari.co.uk/en/forex-trading.html. This page demonstrates the principles of how (for example) GBP (sterling) as a base currency relates to USD (US Dollar) being the quote currency. There are also some other helpful explanations of specialist terms on this page that could help you understand the notions of trading forex.
Tagged Business, dollar, economics, forex, gbp, pund, recession, usd
Sterling Effort was created to stuff some financial knowledge into those of us who grew up without being taught how money really works; how to make it, save it and grow it. Our aim is to give you clear and concise information regarding personal finance and hopefully provide some entertainment along the way.
MoneySavingChallengeOctober 22, 2012 at 7:33 pm
I’ve seen forex mentioned quite a lot on US blogs but never really looked into it in any great deal. Is it similar to spread betting, i.e. using your knowledge to bet whether a currency might rise or fall? Would be interesting to know if there is an ‘amateur’ segment of the market making money from it.
AshOctober 22, 2012 at 11:20 pm
Exactly, Donal. You buy/sell currency pairs with the intention of profiting from small term fluctuations. You can buy on margin to juice your returns. I think understanding currency exchange is interesting but I don’t participate in this kind of thing. I used to, and I made money out of it. I don’t know whether it was luck or skill. Most likely luck! But I needed the funds for a deposit on a house so I stopped trading and I never went back to it. The reason being, even it WAS skill and it was a good way to make money, if doing this ‘work’ doesn’t add any value to the world, what’s the point in doing it?!
AshOctober 22, 2012 at 11:25 pm
Sorry! I should read or write anything this late as I’m clearly not good at it. I just realised I didn’t really address your curiosity about the success of amateur forex traders. Check out http://www.etoro.com/ where traders’ action is basically public and other users can choose to automatically copy the trades that more experienced people are making. I’m not saying that’s a smart idea, but it’s certainly interesting to take a look at some of those big boys’ track records.
MoneySavingChallengeOctober 23, 2012 at 7:53 pm
Interesting site. Hopefully when ‘most followed trader’ Malsolo from Spain bets against the euro crashing he doesn’t encourage everyone else to bet against it too, artificially bringing the whole thing down
I think it is really good that you were able to make some money out of the trades you did, even if you didn’t find it that rewarding in the non-financial sense. Better to leave the table when you are ahead of the game
Michael BrownOctober 23, 2012 at 12:58 pm
Growth for the sake of growth is self defeating. Growing an economy with a structural deficit means that the deficit grows with the economy.
Economic growth is indeed very important, but you have to be growing the right kind of economy for it to be sustainable and beneficial in the long term.
An economy, mainly based with private sector employment and investment is the type of economy that will do the best, with a lean and slender public sector so that the government runs a surplus during good economic years. This gives the government the ability to be in a strong position should things take a turn for the worse and introduce stimuli into the economy without causing a debt crisis…. as it has entered the troubles time with balanced books and has to borrow less to stimulate our way out of this.
This is where the previous Labour government went wrong in the UK. It steered the economy with arrogance, thinking that it had somehow solved economics and its cycles and that boom and bust had magically been abolished.
This caused them, during periods of huge economic global growth to spend tens of billions more than it received and continued to do so for a very very long period.
This is the time it should of been paying down the debt, and ensuring our safety net… eg, gold reserves were not sold off too.
If we entered the global financial crisis with balanced books and gold reserves, the debt crisis in the UK could of been avoided altogether when the international crisis hit. We would of certainly had a recession regardless, but the depth and the length of which would of been minimised and stimulus would have had a very quick and high impact solution. Unfortuently, due to the actions of the last government, a recession became a debt crisis, and this can never be solved by traditional Keynesian economics.