For investors everywhere, news out of UK these days is something to note. The Bank of England announced that it will set interest rates below zero for the first time in history, Brexit political problems are still a major problem, the Pound has been weakening steadily against other major currencies, and COVID seems to be making an unwanted comeback. Indeed, all the major headlines on UK economic news outlets are negative. In the past quarter-century, it’s safe to say that the Pound hasn’t endured any period as threatening as the present.
What’s that mean for investors, forex traders, commodities enthusiasts and others? It’s always difficult to interpret events into usable investment information, but there are now multiple indicators that the UK’s currency, the Pound Sterling, abbreviated as GBP, has some troubled days ahead. There’s also a good chance that British government bonds will be less attractive to prospective buyers. But the major takeaway is the weakness of the Pound and how a smooth Brexit transition might pump new life into it. The extremely negative economic environment in the UK is something that forex traders dream about. Why do foreign exchange enthusiasts sometimes welcome bad news, and how do they see Britain’s troubles in terms of trading opportunity? Here are some of the key points that international currency traders are focusing on amid the past week’s news coming out of the UK.
Is Bad News Good for Foreign Exchange Traders?
Perhaps the first question to answer is, what is forex trading? Simply put, it is a special kind of investing activity in which people purchase currency in pairs and make a profit when the primary currency rises in value against the other member of the pair. These markets are extremely liquid and completely electronic. There is no centralized trading floor. Until the internet came along, individuals were mainly locked out of this type of activity. Now, the massive global forex market is made up of individuals, corporations, governments, and other entities that speculate on the changing values in various international forms of money, i.e., currency.
So, why is news so important to people who speculate on the relative strength of the pound, dollar, yen, and other national denominations of value? Because, as is the case in the stock and bond markets, if you have enough data to make a reliable prediction about the direction of a financial instrument, you stand to make a profit. If a company appears to be getting stronger, you buy and hold its stock shares until they rise in value. If you think a particular corporation is about to go under, you could short its shares and earn a profit that way. Forex traders perceive all the pessimism about the UK’s economy, and especially about the pound, as being a signal that the British pound is on a downward path, which can mean huge profits for traders who time the move correctly and don’t over-extend themselves.
Brexit Negotiations Could Turn Things Around
Even with COVID and negative interest rates, the ongoing Brexit negotiations with the European Union could deliver a strong dose of recovery to the UK’s national financial situation. If the talks break down and drag out the transition period for additional weeks, the pound could be in for more pounding. That’s why global investors are keeping a close eye on the talks. Problems would mean a weaker GBP and more monetary weakness. If the negotiations go well, the downturn could slow or even come to a halt.
The COVID Pandemic is a Wild Card
Trying to predict the path of a worldwide viral pandemic is difficult, as it’s totally based on unknown and random factors. Who would have predicted, four months ago, that many of the world’s developed nations would still be dealing with retail business lockdowns? The UK has been hit especially hard by the virus, both in terms of infection rates, total deaths, and economic damage. If the recent spike in cases lingers for even another month or two, the country’s long-term fiscal health could be at risk.
Negative Interest Rates are Investment-Killers
The official government announcement that bond rates are below zero for the first time in recorded human history was a major blow to the confidence of international bond buyers. Who wants to park money with someone who charges you for the privilege of taking your funds? The entire concept behind capitalism is profit, not guaranteed loss. Imagine if your own retail bank charged you to keep money in a savings account. You’d be better off locking the cash in a safe deposit box where it wouldn’t depreciate. It’s reasonable to say that the British economy is bad and getting worse.
