Author: CFI.co Blogger

The pound – this month’s worst-performing major currency – could “easily drop to $1.18” at the end of June, warns the CEO of one of the world’s largest independent financial advisory and fintech organisations.

The warnings from deVere Group’s chief executive and founder Nigel Green come as it is revealed that the British currency shed almost 4% against the U.S. dollar in May and 3% against the euro.

Mr Green comments: “The pound is this year’s third-weakest major currency – just behind the New Zealand dollar and Norwegian krone, which have done even worse.

“The pound has been battered since the Brexit referendum in 2016 and the ensuing years of political uncertainty, losing around 20% of its value since the referendum. 

“The Covid-19 crisis has been another hammer blow for sterling as it promoted a flight-to-safety and ramped-up the search for liquidity.  This situation is a win for the U.S. dollar and, in turn, a loss for the pound.”

He continues: “There are legitimate concerns that the pound has further to fall in the next few weeks.

“It could easily drop to $1.17-$1.18 by the end of June due to renewed and heightened fears of a negative shock due to a no-deal Brexit combined with the far-reaching economic fallout of the pandemic.”

Negotiations between the UK and the EU on their post-Brexit future relationship stalled on Friday with the EU’s chief negotiator Michel Barnier saying the two sides risked reaching a “stalemate.”

The British Prime Minister Boris Johnson has repeatedly threatened to walk away from the talks if insufficient progress has been made by next month’s high-level negotiations. The UK has indicated the alternative of an “Australia-style” deal, a relationship where both sides trade on basic World Trade Organization terms, similar to a no-deal Brexit.

“An even weaker pound will help to reduce people’s purchasing power and a drop in UK living standards. Weaker sterling means imports are more expensive, with rising costs being passed on to consumers,” says Mr Green.
 
“The fall in the pound is good for exports some claim, but it must be remembered that around 50% of UK exports rely on imported components. These will become more expensive as the pound falls in value.
 
“A low pound is, of course, bad news for British expats, amongst others, who receive income or pensions in sterling.
 
“The country’s financial services sector – which represents 6% of all economic activity – will also be adversely affected because it is built on foreign investment that puts its faith in sterling being strong.”

The deVere CEO concludes: “The pound will remain volatile, and is likely to become weaker in the next month.
 
“As such, it can be expected that domestic and international investors in UK assets will be seeking the available international options available to them.”

Negative interest rates are coming and investors will now be looking to bolster their portfolios to ‘get ahead of the curve and build wealth’, says the CEO and founder of one of the world’s largest independent financial advisory organisations.

deVere Group’s Nigel Green is speaking out after rate options, which gauge monetary policy forecasts, implied on Monday a 23% likelihood that the key federal funds rate will drop below zero by the end of 2020, according to BofA Securities data.

It’s not just the U.S., the world’s largest economy, which is moving towards this scenario.

On Tuesday, the Deputy Governor of the Bank of England also suggested that the UK may be headed toward negative interest rates.

Mr Green comments: “A new global era of negative interest rates would have been unimaginable even a few months ago.  But this has now changed due to the coronavirus.

“As central banks around the world grapple to control the economic impact, it can be reasonably expected that more and more of them will take a dramatic change of policy course and take rates to below zero – like their peers in Europe and Japan.”

He continues: “There is legitimate debate about the efficacy of negative interest rates on boosting economies. 

“They could turn out to be a masterclass in the law of unintended consequences as they could be viewed by consumers and investors that the underlying economies are in a perilous position and, as a result, prompt a drop in consumer and investor demand.”

Whilst the debate on whether negative interest rates help the ‘real economy’ or not will continue, there is no doubt that they help boost financial asset prices.
 
“With this firmly in their minds, market-wise investors will know be looking to bolster their portfolios before the next round of cuts and the likely subsequent price increase. They are taking advantage of the lower entry points now before the next major rally,” notes Nigel Green.
 
He goes on to add: “In addition, those with savings in the bank are already getting no return thanks to the ultra-low interest rates.  Negative rates will offer them more reason to increase their exposure to equities, for example.”
 
The deVere CEO concludes: “The question mark remains on whether cutting rates from their already low levels will solve the issues created by the coronavirus outbreak.
 
“I believe, due to the economic situation and the hints from central banks, that there are more rate cuts on their way as they know it’s not sustainable to just keep printing money.

“This ‘direction of travel’ will push up financial asset prices and, as such, many investors are now looking to get ahead of the curve and build wealth.”