Central bankers are calling the shots these days, causing currencies to erratically move at the slightest hint of a change in policy and no one has ever pulled than America’s central bank, the Federal Reserve.
The chairman of the Fed announced that it will start to take its foot off and stop the pumping of billions of dollars into the economy of the US over the forthcoming months.
The result was threatening to ensue panic with the dollar soaring as money poured into the safe haven currency. Realising the reactions were too extreme, the chairman surprised everyone by doing a U-turn which signaled a prolonged period of monetary easing.
The more surprising turn of events last week was when both the leaders of the Bank of England as well as the ECB took the extraordinary steps of stating their intentions on the monetary policy and interest rates. They both proclaimed that any rate that arises is indeed a long way off and they will continue to supply easy money funds.
This level of plain speaking is not heard of, it’s not surprising that the sterling and the normally Teflon-coated euro has been experiencing some bouncing off in recent times.
All three central banks have now hinted a need for heightened additional stimulus. The positive economic reports from the US and the UK are being outweighed by negative sentiment coming from their respective central banks.
The only problem is that everyone has become overly dependent on the central banks by providing liquidity. Unfortunately, the markets are setting loose monetary policy and the QE3 in the US has developed into a worldwide sweet tooth which the waves are felt from the slightest hint of the taps.
The dollar is at the top, and we see a market driven almost purely driven by the dollar. The sterling’s weakness has more to do with the dollar getting stronger than that of the actual currency fundamentals.
The picture is far rosier than either the UK or the rest of Europe. The present Governor of the Bank of England seems to be well determined to keep a downward pressure on the pound. It is very likely that the sterling will continue to suffer heavy losses even if second-quarter growth reveals positive results.
Furthermore, pretty much all year round, the sterling has traded on the back foot which was impeded by talks of triple-dip recessions and sovereign-rating downgrades. Nevertheless, the reality is not that bad and what’s left to do is to wait for the sterling U-turn.
The UK is in a much better position than its neighbouring Eurozone counterpart. With the weaker nations pitching from one debt crisis to another, the single currency has been riding the peak of the wave that reacts positively when the news is not as bad as the market was anticipating. What the markets actually forgets is the underlying gloomy state of affairs within the region.