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The pound may be at a two-year low – but US and European central bank decisions will have much bigger repercussions
As the US Federal Reserve and the European Central Bank’s moves emerge over August and September, it’s worth remembering that there are a few silver linings in the pound’s current weakness
The pound is taking a pasting. The foreign exchanges hate uncertainty and Boris Johnson is delivering that in shedloads. The clear possibility of the UK leaving the EU on 31 October without a deal has pushed sterling to the lowest for more than two years, and I think it will head lower still. For British travellers abroad this will be a glum August.
We’ll come back to the pound and the UK economy in a moment. Focus first on two other things this week: the forthcoming cut in US interest rates and the performance of the eurozone economy. Both are more important to the world economy than the gyrations of sterling.
The US Federal Reserve will cut interest rates on Wednesday. It has signalled that the only issue is whether the cut is by a quarter or a half a percent. Characteristically, Donald Trump is urging a large cut, but if you see this more as a signal of direction and a precaution, the quarter point makes much more sense. The flurry of expectation that were the US economy to slow seriously, the Fed would pump in the dosh that has kept US equities close to record levels and pulled down long-term interest rates too. And because what the Fed does affects world markets, asset prices everywhere have a sort-of insurance policy. If the world economy slumps, the Fed will bail them out – or at least that is what they think.
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