British Pound (GBP) Latest: GBP/USD and FTSE 100 Rally Look Vulnerable
The price of the British Pound (GBP) has been trending strongly lower on a daily basis in recent days. This is bad news for financial investors looking to make money as well as those looking to purchase goods at lower costs in the UK.
If the trend continues it could put more pressure on the currency market and fuel further trading weakness. Those in the investment field will want to consider different investments such as emerging markets to hedge against this risk.
The currency market has historically acted as a barometer for global economic activity and may now be weak because of uncertainty caused by the financial crisis. The downward price movement should be watched closely as another potential means of inflation. Most economic indicators are pointing to a strong recovery from the crisis, and so a stronger currency could be an indicator that there will be some slowing in global growth.
The big question is how much damage the falling British Pound can do to the UK economy and the currency market? It’s important to note that the dollar will continue to be strong and even if the pound strengthens, it will be in a weakened state as long as the US economy is stable.
Emerging markets that have strong currencies such as Brazil, India, Russia, Turkey, China and others have helped increase the value of the USD. If the trend continues it is possible that the GBP will fall into the weaker zone as emerging economies weaken. In this case the weaker GBP may fall into the weaker US dollar.
Global growth has been slowing recently, so some believe that the impact will not be felt in the UK until later. Since so many countries are experiencing negative economic conditions, this will hurt currencies and this could even spread to the US dollar. It is very difficult to forecast the effects of global trade, but the currency market is generally not responding well to increased global economic problems.
One reason the dollar is weaker is that it does not show strong economy like the US economy. The dollar has a big advantage as a reserve currency so even though it is facing low economic activity, its position as a reserve currency allows it to face stronger global economic forces.
This type of thinking should lead to a more cautious market as traders learn how to read current global economic problems. This means that the long term outlook should be pessimistic for the British Pound and investors should be more careful as to where they invest.
The concern is that some governments are going to experience more economic difficulties than others, which is a reflection of the global financial crises. Those countries such as Brazil, India, China and others could experience worse problems as their government’s struggle to control runaway inflation.
In these cases the strong currency will become an issue and the demand for the currency could be very strong as they try to hold the ground. This may result in a currency war as these emerging markets try to increase the strength of their currencies.
On the other hand if the demand for the currency becomes very weak, then additional risks may be introduced in the currency market and this would be much more damaging. It is this type of scenario that we could see play out in the future.
There are still three years left for the British Pound to rebound, and this should provide some encouragement to any investors who have been losing confidence in the currency market. However, it is important to remember that the currency market is relatively new and there will be some risk in any investment that you decide to take.