While there are many basic rules related to money markets, there is one that stands out as more significant than others. This is that interest and exchange rates drive returns, especially in the Forex market where traders buy and sell currencies or hedge against the performance of a specific pair. You will execute orders according to a constantly fluctuating and real-time exchange rate, and this will determine your margin and bottom line profitability as a trader. These rates can be affected by a number of external market conditions, as we have seen most recently with the uncertainty surrounding Britain’s future participation as part of the EU.
How is market speculation impacting on the Pound
In specific terms, the value of the pound has declined considerably as the British government and private sector business owners continue to debate the merits of remaining in the EU. Conservative leader and Prime Minister David Cameron has recently negotiated an initial deal with EU representatives that could see Britain remain as a member nation, prior to holding a June referendum which will canvas the opinion of the nation. Cameron undoubtedly wants to remain in the EU, so he is hoping the renegotiation of more favourable membership terms will sway the UK public.
This decline began in earnest in January, as speculation spread and investors sought refuge. In this instance, the main issue with the pound did not centre on fluctuating exchange rates by themselves, but instead the sense of risk-aversion being influenced by uncertainty surrounding the future of the EU and an overall decline in the global marketplace. According to FX Pro, the risk of more volatile (but lucrative) currencies being dumped in favour of others will drive down demand for the pound and cause its value to diminish on an incremental basis.
This has had a subsequent impact on the exchange rate, making the pound are far less viable option for traders.
Our Final Thoughts
This has wider connotations within the financial market too, as continued uncertainty could see domestic returns for traders decline against overseas investments. The Bank of England (BoE) has claimed that domestic investments have delivered the best return over the last two years, but this could change as the value of the pound declines. If nothing else, this should encourage government officials and influential business figures to be decisive when determining the fate of the UK as a member of the EU, as otherwise the ongoing uncertainty will continue to drag down the value of the pound and the British economy as a whole.