Last week we saw what can happen when an asset, in this case both the British Pound and the Euro , had a flood of investors all pushing the sell button at the same time . The Euro and the Pound saw almost a 5% drop over the course of two weeks against the Australian and U.S Dollar respectively and market observers do not have to look to far to find the reasons for such a rout.
We have been seeing weakening data coming out of the U.K as of late, with one headline likening the U.K economy to a runner going from a fast run to a slow sluggish walk. Then we have the Euro- zone, which has been mired in high unemployment,debt,low inflation worries etc since the onset of the Global Financial Crisis in 2008.
Last week saw ECB President Mario Draghi shock the market by cutting Interest Rates to 0.05% , which in the scheme of things will have absolutely no real impact on the economy what so ever. Interest rate cuts or rises take their time to flow through to the real economy, a delay or lag if you will. The benefits of such a small rate cut in the already historically low interest rates is debatable.
His promise to start buying mortgage bonds beginning in October, or Q.E, has a few more teeth than the interest rate cut which got the market excited but it may be a case of too little too late .Then we had the Russians signing a permanent peace deal with the Ukraine, which saw the markets appetite for risk amp up which led to Pound selling and Aussie Dollar buying. Then over the weekend a poll was held in advance of the Scottish referendum for Independence from the U.K being held on the 18th of Sept and a tight 51-49 vote for the split was the result.
This frightened the market once again and the Pound lost 1% on the open after being closed for the weekend .The UK Guardian printed an article which reported that the Pound could lose up to 10% more if the Vote comes in for an Independent Scotland .Casting our eye over this week tonight in the U.K we have Trade Balance, Industrial Production and Manufacturing Production .We also have the release of the NIESR Gross Domestic Product Estimate which even though it is just an estimate, a positive result of the underlying forecast should provide some strength to the Pound, yet after a week like we saw last week I would not be holding my breath .