Yesterday was anticipated to be a key day for the currency markets. Much of the drive for Sterling’s recent strength has been the anticipation that the UK will be the second Western nation behind the US to raise interest rates after years of record lows.
The recent global turmoil rooted in a poorly performing China saw an immediate impact on the confidence of commodity currencies such as the Australian Dollar. However, we have had to wait until now to get a clear picture on how the UK economy’s future, and therefore the Pound, will be affected by this most recent global financial shock.
The following overview examines yesterday’s key data, the latest domestic developments, as well as a keen look at the current state of European and global markets. If you would like to discuss this report in more detail please call straight through to our trading floor on 0800 328 5884 or 0044 1494 725353. Our experienced team of foreign currency brokers will be happy to discuss your currency exchange requirements and the options open to you.
Bank of England sit on their hands
We have come to expect caution from the Bank of England. As such today’s decision to keep rates on hold at 0.5%, with no change in the voting pattern of 8-1 against a hike of the 9 members of the Monetary Policy Committee, was no surprise.
Certainly analysts were not expecting any more members to vote to raise rates in the wake of this global turbulence, but some were worried that a whitewash of 9-0 against a hike was possible. This would have severely pushed back the forecasts for any future interest rate hike, and Pound exchange rate weakness would have resulted. For example, last month it was expected that 2 of the 9 would vote for a hike. When only one voted in favour Sterling fell by over 2 cents against the Euro alone in the space of 40 minutes.
Luckily for those holding Sterling, the committee were cautious but not overly so. Sterling remained relatively stable throughout the day, keeping current buying levels for EUR, AUD, CAD, and NZD up at multi-year highs.
Bank of England Minutes reveal long-term concerns
Alongside the interest rate decision, a host of other information is released from the committee’s recent meeting. The minutes were the most influential in determining yesterday’s Sterling value as well as long-term forecasts.
The mix of positive and negative tones in the minutes reflects the currently cautious atmosphere emanating from the UK’s financial policy makers. The start of the report noted there was ‘less risk than in August’ following the events of ‘Black Monday’. This was the massive global stock market slide following a string of poor news released on the Chinese economy. Later the minutes took on a more worried tone stating that it was ‘too early for conclusions on global developments’ and ‘downside risk to economic activity has probably increased’.
The word China came into play 10 times across the 7 pages of the minutes. While they are being cautious we can certainly see that our financial policy is being dictated by negative forces outside of our control. This is likely why Sterling weakened very gradually over the course of the afternoon.
What can we expect for the Pound moving forward?
China posted additional negative news overnight to add to the fire, so this issue will not be ‘swept under the rug’ as Greece was for the Eurozone recently with their bailout.
In the coming months we will likely see more delay tactics with a mixture of positive spins concerning the British economy, counteracted by sensible caution over the global marketplace without any firm commitment to a rate rise.
In reality most analysts are now expecting a rate rise to be a year away now rather than next Spring. During this time we can expect confidence in the Pound to be sorely tested with a resulting gradual loss of value. Though no-one has a crystal-ball one thing is certain, the mammoth jumps Sterling enjoyed a few months ago when our economy and the global financial situation seemed healthy enough for a rate hike are over in the short-term. Possibly even until 2016.
As a result I believe that the current market presents some excellent opportunities for clients looking to use Sterling to buy foreign currency. So, if you need to buy Euros, Dollars or any other of the major currency speak with one of our experienced team of currency brokers today on 01494 725353, or email me directly at firstname.lastname@example.org.
Euro the biggest winner following Black Monday
The Euro was the safe-haven currency of choice when investors were fleeing the global stock-markets last month. The Eurozone has recently proven itself to be committed to stability at all costs with Greece’s most recent bailout, and its recent cheapness that many Sterling holders have enjoyed made it the most attractive currency to hold capital in until it was safe to purchase assets and securities once more.
This dramatic increase in demand was what catapulted the Euro’s value to its recent highs. GBP/EUR exchange rates reached 1.34 but since then this artificial strength has begun to deflate. The boldest investors have begun a massive buying program whilst everything on offer is cheap, and must sell their Euros to do so. Lowering Euro demand and therefore its value.
Will Greece cause the same trouble it did in January?
In the January election where the anti-austerity party Syriza were first elected in Greece we saw significant Euro weakening as a potential ‘Grexit’ was fast becoming a possibility. The snap election called by the Greek Prime Minister Alexis Tsipras following the Greek Bailout, done so to avoid any crises of authority, is now only 9 days away. The very reasonable question to ask is, can we expect more of the same Euro weakness? now that Tsipras’s Syriza party are neck and neck on the polls with the new party composed of anti-bailout rebels?
This seems unlikely. While the polls are neck and neck the bailout vote already showed majority support in the Greek parliament. This means that Tsipras will have a host of options on parties to form coalitions with to gain the majority necessary to remain in power and prevent any roadblocks on the Greek bailout.
The announcement of a majority for Tsipras will truly put any consideration of a Grexit back by years, and Euro strength will surely follow. While rates are at these high levels clients may be wise to move ahead of this event and secure their Euros at what were considered 7 year highs earlier in the year.
USD sellers another big winner this past month
The capital flight from Black Monday also benefitted those holding US Dollars. While the Euro was the cheapest safe-haven currency, most stocks are denominated in US Dollars, which received an automatic boost from the massive global sell-off.
The US economy continues to go from strength to strength and seems like a diamond in the rough compared to the flagging Asian market place. Recent non-farm payroll figures, which are a key economic indicator for the world’s largest economy, showed that 170,000 new jobs were created in August alone and now the US unemployment rate is at 5.1% - a 7 year low. The US suffers from the same problem as the UK; great economic figures, but worryingly low inflation figures. This is one of the reasons for the FED’s caution on raising interest rates, alongside the same concerns over China.
But the US’s upcoming election is putting significant political pressure on the FED to raise interest rates. Through Congressional Hearings Democrats are constantly questioning why the FED is being so cautious in a bid to produce something tangible to offer voters next year. This is why the USD is continuing to strengthen while Sterling is being ‘left-behind’. I expect further USD strength in the short-term creating further excellent opportunities for sellers.
Australian Unemployment slide reverses
In the early hours of this morning we have heard the latest set of unemployment figures for Australia and they have shown a marginal decrease. The unemployment rate fell from 6.3% to 6.2% and as a result we have seen the Australian Dollar (AUD) strengthen against some of the major currencies including Sterling. This is a welcome break for AUD sellers who have seen the value of their capital plummet following recent events with their trading partners in China.
The current and sudden cheapness of the Australian Dollar is being snatched up, and the increased demand is causing the market to correct from its recent lows. I would not be surprised to see the Australian Dollar become more expensive whilst it is subject to more traditional market forces rather than the spiked we have become accustomed to; buying low, selling high. We are still currently trading at some of the best levels on the Australian Dollar for almost 8 years so if you do need to buy Dollars call us today.
To be kept informed of all the latest currency news and the options available please call our trading floor on 00 44 (0)1494 725353 or email me directy at email@example.com.