The GBP is surviving because other currencies keep failing

Sarah Parker's picture
Authored by Sarah Parker
Posted: Tuesday, September 1, 2020 - 17:31

The British Pound has been under serious strain for the last couple of months. This strain was mostly due to the Coronavirus pandemic, but let’s not forget the prerequisite crisis that the UK was going through already, the Brexit withdrawal recession.

The GBP has been taking punches for more than a few years now and at this point, it’s pretty much used to losing 1% overnight due to a new crisis happening somewhere in the world. However, many would think that by now the GBP would have been reduced to a shadow of its former self, and they’d be sort of right. Sure the exchange rate relative to the USD is not there anymore, but the exchange rate relative to pretty much every other currency is going strong.

This is mostly due to the COVID-19 pandemic being a global one, thus affecting all economies it touches.

Unemployment rates keep pounding the world

Based on analysis and reports from regulated UK forex brokers, the GBP is not very sensitive to the development of small businesses in the country. What this means is that any change in small business success or the unemployment rate in the country is going to have a very small effect on the overall economy. This is mostly due to the heavy concentration of large corporations in the UK’s cities like London and Edinburgh.

Many don’t realize, but this is an extremely useful tool that the GBP has, and most likely a very unique one as well.

For example, reports of high unemployment rates in Sweden have absolutely decimated the Krona’s exchange rate relative to the GBP, when in reality Sweden’s economy has been in much better shape than the UK’s for the past few years. This is mostly due to the understanding that a high unemployment rate means unemployment for small businesses as they usually can't afford to subsidize salaries, while large corporations can take that hit.

Because of this, in economies like Sweden, a high unemployment rate is directly tied to massive production deficits and therefore a terrible gap in predicted export numbers. All of this then accumulates into a declining economy as imports outweigh exports and implode the exchange rate of a currency.

Euro holding firm

Probably the only case where the GBP has very little advantage is its rivalry with the Euro. Due to the limited effect that the Coronavirus has had on the majority of the largest contributors to the EU economy, the EUR has emerged as sort of a safe haven for most investors.

Sure economies like Italy and Sweden may have taken a massive hit from the pandemic, but other juggernauts like France and Germany are still holding still. The EUR is another currency that has these unique features when compared to the GBP you see. If half of the Union is in a recession, but the other half is doing just fine then it counterbalances the crisis. With the GBP, it’s much different. If the economy is doing terribly, then it’s doing terribly.

And it’s not like the EUR is a fair game as well. The whole of the EU could be in a recession, but a jump in German economy could counterbalance that without an issue in some cases.

Fighting exotics

The GBP’s performance compared to exotic currencies like the ZAR, NZD and various others are also admirable. But that much was expected from a major currency. Unfortunately, most forex tools are designed to take almost all kinds of performance into account before giving their prognosis. This includes considering GBP performance relative to those currencies mentioned above. This causes and overwhelmingly positive outlook, thus enticing many institutional and retail traders to strengthen the GBP even further.

Considering the relatively smaller volatility of the USD, GBP is slowly starting to become the ultimate alternative for most as they seek even further profits with the changing economic landscape of the UK. The US may seem like a currency safe haven, but most people are starting to look for profit now, and it can rarely be found in USD nowadays.

GBP will still crumble

One of the few things that are holding GBP back from its full potential is the January deadline for Brexit. Should the COVID-19 pandemic still not be well under control in the world, the economic implications of this deadline could be much deadlier than anticipated.

Furthermore, we need to consider the difficulties of international trade that would have been caused by the January deadline. Pair that up with a global pandemic, and we get an absolutely decimated British export market.

Don’t forget that not everything has been agreed upon by the EU and UK representatives, meaning that they may have to “wing it” as the deadline is met and the world seeps further into the worst health crisis in the last 100 years.

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