The British Pound is currently trading at its highest point in the past five years. What causes this to be the case?
If you believe in the benefits of a common currency, then it's no wonder that there are many people out there who are selling the British Pound. The currency has risen over the past few months due to the massive amount of money pouring into the markets and even more in the aftermath of the last two global economic recessions. The Fed and other central banks have begun to reduce their stimulus and money is pouring into the markets as a result.
And there is something else; interest rates are now at a premium and there is some fresh yield in that. In the United States, where the American Dollar is being devalued, the reason for that is because of a return to "normal" stimulus.
The FTSE has also experienced a dramatic rise in its value. This has increased the potential for upward price movement in the days to come. But will this upward movement materialize?
It's too early to say how the FTSE will react but at the moment it is in a positive rally. That alone is cause for optimism. But the other big benefit is the fact that so many people have lost a lot of their savings through the recent recession. Therefore, there is a massive amount of money to lend.
The FTSE is down about four percent today and should recover slightly in the coming weeks. While we may be in the dog days of summer, the economic recovery is still going.
What are the implications of the FTSE's rally? Well, not only does it increase the chances of an upward move in the prices of stocks and shares, but the rise in the Pound also means that foreign investors will be more willing to take risks and invest in the US dollar again.
Why? Because they have been forced to accept much lower returns on their currency due to the drastic declines in the value of the British Pound. Now, with the ability to earn dividends in return for these lower returns, they are back to reclaim some of their losses.
Even with the prospect of a dollar return, the rates of return for riskier investment methods such as equities have declined. Therefore, you would expect the cost of investing in stocks to have gone up as well. The effect of that will be a further downward movement in the market.
The upside to this is that the FTSE may reach its highest level this week. That would mean that the markets would be trading at an all time high. Since all past benchmarks are at their highest levels and future financial forecasts have been reasonably accurate, the odds are very high that they will continue to move higher.
The next peak in the Pound is not far away. The FTSE has risen over the past year and there are more positive signs that the future will look very different. So, as these markets go higher, there will be another huge support level that the FTSE will naturally bounce off of.