Brexit could become a key driver for exchange rates in June with the EU Summit due to take place at the end of the month.
The outlook for Pound Sterling
The Pound had been rising in March and April on improved interest rate expectations but took a knock in early May as investors questioned whether or not the UK would be raising interest rates this year or even next. The market perception is still to see a hike later this year but we will need to see some very strong evidence of rising inflation which so far has proved lacking, hence the recent drops for Sterling.
June seems unlikely to dramatically alter that perception but Brexit will become a factor once again with the EU Summit which begins on the 28th June and could see some progress on Brexit. Key questions on the final arrangements between the UK and the EU will be outlined with a White Paper which will detail future proposals ahead of the EU Summit. Any well received news could help Sterling, at every previous EU summit the Pound has risen around the news.
Sterling should remain supported with the much reduced chance now of any ‘no-deal’ scenario and the longer-term possibility of a rate hike. Expecting any big moves higher will ultimately be determined by the strength of UK data and how well the markets receives the next stages of the crucial Brexit developments.
Economic data and interest rates vital for Sterling
June begins with the all-important PMI (Purchasing Managers Index) Manufacturing data on Friday 1st June, before Construction on Monday 4th and Services data Tuesday 5th. Services accounts for the biggest component of the UK economy so can be the biggest driver of the three releases. All the releases have been coming in above 50 which represents expansion in their respective sectors and I don’t see any particular cause for concern here.
Friday June 8th sees the latest NIESR (National Institute of Economic & Social Research) GDP (Gross Domestic Product) estimate. GDP is being very closely monitored since the Bank of England revised down their interest rate expectations in May based on the poor GDP data for Q1. The NIESR report monitors the previous 3 months and could see Sterling higher if it reflects the UK economy has rebounded following the poor weather in March.
Tuesday June 12th Inflation data will be useful as a guide to the likelihood of any future interest rate rises, May’s data showed a fall in the rate to 2.4%, removing the more immediate pressure on the Bank of England to hike. Any further falls would be negative for the Pound, this is a very important date in the diary for any clients with a GBP requirement.
Wednesday June 13th is the latest Unemployment data which was supportive of the Pound in May as the 40-year low in the rate of Unemployment reflects the strength of the economy. Thursday June 14th will see Retail Sales released but the biggest news is likely to be the latest Bank of England interest rate decision on the Thursday June 21st June. Finally, on the economic Friday June 29th will be released, this was the data that so knocked confidence in the UK interest rate hike expectations. Ultimately, with the Bank of England linking any future hike so closely to the GDP data in Q1 when they met in May, the release of Q2 data on GDP will be the most interesting in the future.
For clients looking to buy or sell the Pound eagerly awaiting key news on UK interest rates, you might have to wait until August for any decisive news. Interest rates are the key talking point but with little chance of them being raised quickly, clients hoping for a sudden spike in the value of the Pound could up disappointed.
Brexit White Paper and EU Summit to move the Pound
David Davis, the Brexit secretary has announced a Brexit White Paper (proposal) to be released in June and, combined with the EU Summit, which begins on the 28th June, this may form a key driver for the Pound in June. The White Paper is expected to be released ahead of the EU Summit so clients with a position should be prepared to act in the weeks ahead of this.
At all of the previous summits the Pound has risen in the week before as speculation over what will be decided is eroded with leaks and highly publicised announcements confirming progress. Further developments in key areas including Financial Services and regulation could see the Pound rise as the progress underscores the ‘softer’ Brexit we seem to be aiming for which is supportive of the Pound.
Sterling remains at the mercy of sentiments relating to the longer term outlook from Brexit, key progress might help the Pound towards the end of June. Economic data will also be vital to the Pound helping shape interest rate expectations. All in all, the Pound should avoid any cliff edges and continue its gentle progress against some currency pairs, dramatic moves higher seem to be reserved for later in the year however, once markets can be really sure about just what Brexit means.
When to buy Euros in June?
In the Eurozone, Italian politics has weakened the Euro and raised concerns about the longer-term direction for European politics and the single currency. The concerns stem from an increased chance Italy may leave the Euro and pursue a much looser economic policy which would corrode the economic progress made since the worst of the Eurozone debt crisis.
Economic data will also prove vital for markets to gauge the possible developments in monetary policy from the latest ECB (European Central Bank) interest rate decision on Thursday June 14th. The ECB is loosely on course to consider raising interest rates in the future and scaling back their QE (Quantitative Easing) program. However, slightly below par economic data and the fresh political concerns mentioned above may have derailed that expectation which had helped the Euro to remain so strong earlier in 2018.
To me, it seems the gentle progress the Pound has enjoyed against the Euro will continue but overall we remain within the ranges of 1.13-1.15 as there is no significant expectation either currency will perform particularly badly or well, in June.
Key news that has helped the Pound has been the progress on Brexit since the December and March EU Summits with the 28th June meeting a further chance of positivity. Any really good news from this and also the Government’s Brexit White Paper, a proposal to be released in June, might help GBPEUR to retest the 1.16 high or above. European politics is going to be vital in June as speculation over Italy’s direction continues to weigh on the Euro. Previously, high expectations the Eurozone was on a firm political footing have been shattered with worries the Italians might in the longer term seek to exit the Euro.
The ECB meeting on Thursday June 14th will be vital to the next stage for the Euro, 12:45 is the decision and 13:30 the Press Conference which can usually be more interesting to provide news on how the ECB views policy. Other key news will be Thursday June 7th with Eurozone GDP (Gross Domestic Product) released. Friday June 15th sees Inflation data which has been so key to whether or not the ECB will continue with its QE program. It is difficult to see the Euro strengthening significantly, with no really strong economic data likely and the Italian worries hanging around. I see potential for the Pound to Euro rate to rise and retest the 1.16 level if there is continued uncertainty over Italy and the Pound starts to benefit from an improved outlook on Brexit or interest rates.
However, what appears most likely is us continuing to trade in the familiar ranges of 1.13-1.15 as the market continues to struggle to see any significant reasons to push either currency into fresh territory. Whilst anything is possible on the currency markets the increased clarity over Brexit should prevent any major move lower for the Pound. Likewise on the Euro, the still overall positive economic outlook should prevent any major losses.
GBPEUR seems most likely to continue the gentle path higher it has been edging out towards the mid-teens. Clients looking to buy or sell the Pound or Euro should be making careful plans for a very busy month ahead with a number of key events that could potentially move the rate.
When to buy US Dollars in June?
I expect the big day on GBPUSD to be the 13th when we have the Fed Interest rate decision and the UK interest rate decision on the 21st.
The US Dollar has been in the ascendancy as the market fears problems ahead in the Eurozone and the US economy looks to be one of the better bets for the future. With the US central bank, the Federal Reserve expected to raise interest rates twice more this year, investors are getting a much better return than elsewhere.
Trade War fears have subsided with the US and China agreeing to measures which will avoid any high tariffs and problems in the global economy. The agreement is subject to future cooperation with the US seeking to reduce its substantial trade deficit with China and concerns over intellectual property theft. With initial concerns the US economy might start to lose some of its might in 2019 fading, further US Dollar strength seems high. Key developments in June are on Wednesday 13th when the interest rate meeting will provide further insight into exactly where the US economy and the US Dollar is headed.
June kicks off immediately on the GBPUSD rate with the 1st seeing the latest NFPR (Non-Farm Payroll) data, a key economic indicator used by the Fed to shape policy. Unemployment is also released and has been very low in the US, providing further reason for the central bank to look to raise rates. The NFPR data can be a very volatile release and clients looking to buy or sell US Dollars could see some good opportunity. The general impression of a weaker Pound against a stronger US Dollar seems likely to persist with the divergence in monetary policy set to continue.
Essentially the US are looking more likely to continue raising interest rates, the pace of which might rise sooner than expected. Meanwhile the UK has been scaling back the prospect of hiking interest rates and with it, we have seen the Pound to US Dollar rate fall to some of the lowest levels in 2018.
June 12th see Inflation data at 13.30, June 14th is US Retail Sales and Thursday 28th US GDP. These releases will all be seen in the light of whether or not they make any further hikes likely or not. I expect the big day on GBPUSD to be the 13th when we have the Fed Interest rate decision and the UK interest rate decision on the 21st.
The EU Summit 28th June will also be key on GBPUSD as we get news on what lies ahead on Brexit, this could give the Pound a lift. Ultimately, waiting until the end of the month to buy US Dollars could be risky if poor UK data and strong US data earlier in the month has pushed GBPUSD closer to 1.30 on the interbank rate.
In almost 6 weeks the Pound has lost 11 cents on the US Dollar with GBPUSD touching 6 month lows. The trend may continue and key will be UK and US data, the progress that has been made on Brexit should help GBPUSD to remain above 1.30. Any escalation of the Trade War issues or progress in Italian politics might help to soften the US Dollar, if the Pound does have a good month levels back in the mid to high 1.30’s are possible.
The best strategy does seem that clients buying US Dollars might wish to protect their positions very carefully whilst US Dollar sellers for Pounds might find further opportunities.
When to buy Australian Dollars in June?
Tuesday June 5th is the RBA Interest rate decision and Rate Statement which might well trigger volatility.
The Australian Dollar has been rising as the Trade Wars threat subsides giving markets confidence about the future economic outlook for the Australian economy. China were potentially to suffer at the hand of a worsening relationship with the US which would have had a big knock on the Australian economy.
Investors are keenly watching the RBA (Reserve Bank of Australia) who will meet early in the month on the 5th June, to discuss monetary policy. The market seems to expect the possibility of a rate hike in the future but this could be well into 2019. Concerns about the Australian economy overheating have subsided but the outlook remains challenging still.
GBPAUD rates had dropped to fresh lows as the weaker Pound struggled against the resurgent Australian Dollar. Economic data begins on Monday June 4th with Retail Sales, this could impact shorter term movements and clients buying Australian Dollars will be hoping to see the interbank rate back above 1.80.
In one of the most significant releases in June, Tuesday June 5th is the RBA Interest rate decision and Rate Statement which might well trigger volatility. Ultimately the lack of any exceptionally positive news might see this as a non-event, however, Governor Lowe has been linking risks lately to what is happening in China.
As well as political issues with Trump there is Chinese data released Friday 8th June detailing overall Import / Export data and Saturday June 9th is Chinese Inflation data. This news is always likely to potentially move the Aussie but this time more than usual as the Trade Wars issue and the potentially significant effects are being very carefully monitored. Wednesday June 6th is the latest Australian GDP and Thursday June 14th Australian Unemployment, either of which may provide opportunities for well-prepared buyers and sellers. With markets expecting the RBA to keep interest rates on hold throughout 2018 and possibly 2019, the possibility of the UK raising interest rates might provide some lift on GBPAUD.
The UK interest rate decision on 21st June plus the US interest rate decision on the 13th June will all be potential trigger points on GBPAUD exchanges. The Australian Dollar has been losing ground as the US Dollar has been appreciating in value, this trend weighs the AUD down against all currencies including the Pound, presenting better opportunities for AUD buyers with Pounds.
Sterling might find some form towards the end of June on the 28th with the EU Summit news, clients looking to buy Pounds with Australian Dollars might wish to capitalise sooner than later on the recent improvements.
Any signs of a worsening Trade War situation with the US and China, or the US looking to hike rates sooner would all see the Australian Dollar lose ground. Longer term, the gap between policy from the UK and Australia could support the Pound and Australian Dollar moving further apart.