Bank of England sit on their hands once more
The Bank of England seems to be treading water with no change at all in the decision, or even the voting pattern, for a potential rate hike. The Monetary Policy Committee is made up of 9 members who vote to either raise, hold or cut rates. For the second month in a row the decision to keep rates on hold won 8 hands-up, whilst a hike had lone support with one member only voting for a tentative 0.25% rise.
Analysts were expecting no-change in the vote. However, some were worried that the recent string of soft UK data may cause a complete dismissal at the prospect of raising rates with a potential 9-0 voting pattern.
Luckily for those holding Sterling, the committee were cautious but not overly so. As an example, back in July when the last 9-0 vote occurred, Sterling weakened by more than 2 cents against the Euro within an hour of the announcement.
Sterling has instead only weakened slightly and buying levels for EUR, AUD, CAD, ZAR and NZD are still historically fantastic.
Bank of England Minutes echo September concerns
Alongside the decision itself, the minutes from the meeting are digested by the markets throughout the afternoon. The long term forecasts by the BoE are how investment patterns and business strategy are devised for the following month. Significant capital is moved on the currency markets off the back of how these minutes are interpreted, causing sharp rate movements.
The minutes themselves are more negative than last month overall, which is why Sterling fell by close to a Cent against the Euro this afternoon and half a Cent against the US Dollar
The outlook for inflation was weaker, with Core inflation said to be held below 1% until Spring of 2016. Whilst the report did mention modest gains in the housing market and service sectors, industrial and construction forecasts are still dragging on the UK economy.
The word China was mentioned even more in this report than the one directly following the events of Black Monday in August! 11 times across 10 pages, and the repetitive mention of ‘global concerns’ 17 times might as well be a synonym for a weakening Chinese economy as well. This makes it difficult for the UK to consider a rate hike when concerns for demands of its services and goods on the global market in the future are put in doubt.
Markets are again reminded that the UK is not in control of its only financial policy, but rather subject to economic trends outside of its borders. Uncertainty is always detrimental to a currency’s value, and once again Sterling is testing 5 month lows against its currency pairings.
Will we be receiving more positive news for the Pound this month?
By all accounts the UK economy is still performing well. However, currency values are never an exact reflection of an economy’s strength, otherwise that crystal-ball everyone wished for constantly wouldn’t be necessary to predict where the Pound will be in X hours, days, or weeks.
Markets instead work on rumour and positive or negative trends. Based on this report, sectors and data releases which normally spell strength for the Pound could be decidedly absent for the rest of October.
For example, the positive employment data which has regularly translated into Pound strength this year will be hard to come by. Full employment is commonly accepted to be an unemployment rate below 5.5%. The current UK figure is 5.4%, much better than its 7.2% average since the 70s. So the reports talk of ‘increasing evidence of capacity pressures…and of labour skills shortages in particular’ suggest that while the figure will continue to be positive, the gains necessary for Pound to power ahead of its peers this month will be lacking.
As a result I believe that the current market presents some excellent opportunities to use Sterling as a buying currency compared to where we may be next month. 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.
Euro having its most volatile period since its potential ‘Grexit’
The scandal over at Volkswagen last month has had far-reaching consequences for the European economy, as well as financial policy.
Germany is the undisputed power-house of the EU economy. 1 in every 7 of their citizens are employed in the automobile industry, and more are sustained by it indirectly. The initial announcement of the emissions scandal, the recall of millions of cars, and the loss of 39% of the stock-market value of most of the German car manufacturing industry caused the Euro to weaken by more than 2 Cents against Sterling in a single afternoon.
However, whilst the scandal is still ongoing and will eventually cause further Euro weakness in 2016 when record fines are lodged, the single-currency has still rallied to its highest levels against Sterling since February.
Euro profiting from external calamity
The Euro is still benefitting from the staggering and sudden bursts of capital influx from market shocks overseas. This was a mainstay of market trends over the past few months with panic after panic emerging about the slowdown in China, which used to account for 40% of global growth. To escape negative slides, investors moved their assets into liquid currency, and due to the Euro’s cheapness and commitment to stability following avoidance of a ‘Grexit’, this was the ‘safe-haven’ of choice. These regularly spikes in demand for the Euro have seen equal spikes in its value as a consequence.
What has changed now is that a lot of capital has also been pumped into the Euro out of the US, with alarmingly poor jobs data this month questioning the FED’S likelihood to raise interest rates in the short term. Negative news in the US and Asia have now combined to force the Euro into almost 8 month highs against its currency pairings.
This is in stark contrast to Mario Draghi’s (the President of the European Central Bank) financial policy since the beginning of this year. He has felt that the cornerstone of the Eurozone’s recovery rested on a weak Euro. This makes their exports more competitive and stimulates spending by making saving a currency which is weakening illogical.
Mario Draghi has regularly used his monthly speeches to devalue the Euro by highlighting negative spins on economic forecasts and future monetary policy decisions. The Volkswagen (VW) diesel emissions rigging scandal has, however, tied his hands and he has found himself having to defend the viability of investment in the Eurozone. These abruptly positive tones have exaggerated the bullish trend for the Euro, which is why we find GBP/EUR exchange rates marooned in the mid 1.30’s.
It’s interesting that the original scandal that benefitted Euro buyers is also what is causing rates to move against their favour in the long-term. These market forces are not going anywhere anytime soon, so in my opinion the Euro has further ground to make against its currency pairings this month.
Weak USD from FED changeability
The USD hasn’t been this desired since April, so rates for selling into Sterling are currently at their highest levels since that period, which in turn were close to the best available since 2013.
The reason we find ourselves back at these highs rests solely on the near-guarantee given by Janet Yellen, Chairman of the FED, that an interest rate hike would occur before the end of 2015.
Despite poor inflation still widespread in advanced economies, it was the string of positive data in the US in other sectors which caused her to make such a bold claim. However, this came to an abrupt end at the start of October, when new jobs added to the US economy in September came in a full 70,000 lower than expected.
Overnight the minutes from the FOMC minutes will be released from their most recent meeting in September where they decided not to adopt the mantle of being the first advanced economy to hike the base interest rate for the first time since the financial crisis.
Markets have been confused by the mixed messages from the FED, and although these minutes won’t include their reformed opinions after the shock employment data of last week, it will allow them to make conclusions as to why the FED decided to remain dovish and sit on their hands.
The looming election also means that the longer the FED waits the less likely it is a rate hike will be seen even in 2016. A guaranteed change in President means that a change in market confidence and government policy is more than likely. it would be an uncharacteristically confident move for the FED to raise rates if they aren’t sure which direction your economy may be heading once all the votes are counted.
As such, we may now be seeing the best levels to sell the USD if the consensus on long-term forecasts is anything to go by. Those with Dollars to buy may not need to despair much longer.
RBA one of the few confident Central Banks
The Reserve Bank of Australia has gone against the grain for a second consecutive month. In a global economy where markets are wondering when future interest rate rises will occur, instead the question on everyone’s tongue for Australia has been whether future cuts are on the cards.
Glenn Stevens, the Governor of the RBA has been cutting interest rates and introducing quantitative easing more than once this year in an attempt to weaken the Australia Dollar. The Australian economy relies heavily on commodity exports, and with prices slumping. a cheap Dollar is one of the few strategies available to keep demand high for their products on the global market.
However, in recent months he has almost done a complete turnaround. Instead of cutting rates the string of positive Australian employment data and export data has allowed him to stand defiant against the markets and say ‘the Australian economy is capable of weathering any storm’. The Australian Dollar has been strengthening continually against its multi-year lows following Black Monday almost daily due to his optimism. With markets connected to China showing signs of life and normality again, it seems pressure shining a negative light on the Australian economy are being eclipsed and we may still journey down to the 2.0 boundary on GBP/AUD exchange rates before the new year.
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