Forex traders may be in for a somewhat bumpy ride in upcoming months, as the Pound Sterling has fallen to a near one-year low following news that the UK’s economic growth may be slowing. Recent government reports have shown that the UK’s service sector is expanding at the slowest rate seen in the last 17 months.
Although such news may initially appear to be somewhat grim, business optimism has not fallen as much as may be expected. In fact, the vast majority of firms in London’s financial sector continued hiring staff. These disappointing figures are also serving as a strong prediction that the Bank of England will, at least for the time being, keep interest rates at their current levels in an effort to promote economic stability. From the perspective of GDP, the UK experienced .7% growth in the third quarter of this year, while a .5% expansion is considered the likely outcome of fourth quarter activity.
The rise in the value of the US dollar is not only the byproduct of economic weakness in Europe. The now exclusively Republican-controlled House and Senate are considered to be a huge show of support for the US dollar. Government gridlock has, historically, contributed to currency weakness. Fortunately, the United States no longer has to suffer through the degree of turmoil that had embroiled their government over the last two years.
Investors are currently awaiting the outcome of a European Central Bank meeting that is occurring on the heels of a surprise stimulus move by the Japanese government. Many industry analysts are now predicting that the ECB will engage in a similar strategy, injecting much-needed funds into the Euro zone.
Related data points regarding the economic health of the Eurozone continue to be somewhat disappointing. Retail sales have dropped 1.3% on the monthly charts, which exceeded predictions for a .8% overall decline. Whether or not these factors will strongly influence the value of Pound Sterling remains to be seen. If the ECB were to intercede, it is likely that currency value fluctuations would follow suit. It will be interesting to observe exactly how these scenarios play out in the final month of 2014, and what expectations are established for the opening months of 2015.