The advantages of a free floating rate are several: No exchange rate target, so the Central Bank doesn’t need to hold foreign reserves; Use of monetary instruments to support expansionary economic policies; Less opportunity for currency speculation; Freedom for domestic monetary policy, so interest rates can be set by the Central Bank independently to meet its statutory objectives, such as monetary stability and economic growth. L The sterling is considered a strong currency, as traded on the exchange markets as a reliable safe haven.
Among the factors that help to determine his status are included political stability, low inflation, monetary and fiscal policies regular coverage with reserves of precious metals and value against other currencies stable or increasing over the long term. In recent years, however, the sterling has depreciated moderately against the other strong European currency (the Euro), consequently the decision of the Bank of England to kick-start quantitative easing operations and APP (Asset Purchase Facility ) in March 2009 with the objective to provide liquidity to the market, promote economic growth and avoid the specter of affiliation.
The CB in fact (which in its charter has the sole objective of ensuring monetary stability but not economic growth) has launched its easing program only in November 2011 and the first months of 2012, with the two LTR. The SQ program allowed I-J to improve the balance of payments due to the strengthening of exports. However, in September 2013 the sterling reached its 8 month peak on the Euro, thanks to the positive signals from the economy. Indeed, an article from Reuters. Com claims that: ‘Recent strong UK data has led markets to price in a rise in interest rates ell before the Bank of England has flagged.
Short sterling futures show the market is pricing in the risk off I-J rate hike as soon as late next year. The pound rose to its highest in nearly eight months against the Euro of 83. 59 pence per Euro. It also hit $1. 5872 against the dollar, its strongest since early February. The Oboe has said it does not plan to raise interest rates before I-J unemployment falls to 7 percent, which it does not threats to happen until late 2016 “Sterling NAS been picking up support on the back of stronger I-J data,” said Ian Standard, currency strategist at Morgan Stanley.
We have been participating in that move via short Euro/sterling positions,” he said, adding Morgan Stanley expected the Euro to drop towards the 82 pence area. However, he was more cautious on the pound over the longer term as questions marks remained over how broad-based the I-J recovery was. The pound was helped by below-forecast U. S. Retail sales and sentiment data, which dented the outlook for the U. S. Economy and weighed on its currency. 3 Consequently, We expect that the pound will continue to grow in value against both Euro and US Dollar sustained by the good economic data and the likely future sections of the bank of England to loosen the quantitative easing program.
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