The Pound has entered into its most stable period since the beginning of the year, something I doubted I would be writing so soon after the surprising revelation of a ‘Leave’ vote.
For example, GBP/EUR has barely moved more than 2 cents over the past three weeks, a contrast to earlier this year when the average difference in the high and the low each day was 1.5 cents.
So we seem to have found ourselves in some form of limbo. We have been given a long wait, at least six months, before any formal attempts to leave the EU will be enacted. So politics may be taking a bit of a backseat for a while whilst markets wait for ‘new’ information. In the meantime a mixture of UK business news and events outside of the UK will largely be governing exchange rates.
The Pound in the wake of a Brexit vote
Sterling has found some clear support following the quick and effective transition between the outgoing David Cameron and the incoming Theresa May. The Pound seemed fragile when markets were expecting a long and drawn out contest between May and Leadsom for the role of Prime Minister. In this period nothing substantial would be done to address the fallout from a Brexit vote. Instead of waiting until October, May was sworn in, organised a new government, and gave a loose promise that we would not be enacting Article 50 until at least the beginning of next year.
With financial markets given some idea of the parameters and time-scales they had to operate in, we saw some semblance of normality return to the UK, and the Pound was given a welcome boost as a result. This also gave enough confidence for the Bank of England to avoid an interest rate cut last month. The stability which ensued has created an uneventful marketplace over the past three weeks. This is likely to change very soon. When markets are in limbo it is not only a suggestion of stability, but also of anticipation.
With August comes results of how the UK has performed as an economy in the business atmosphere created by the Brexit vote. These will be released over the next few weeks.
Preliminary indications are low but not damning. Whilst business confidence figures have understandably taken a dive, the UK economy has shown itself to be relatively robust.
Stress tests conducted on European Banks last Friday reflected how well they would perform in a recession. UK banks had a strong performance, with HSBC, Lloyds and Barclays shining, with only RBS showing some concerns.
The biggest market mover will be the UK’s interest rate decision this Thursday. The current consensus sets out a high likelihood for a cut, but markets were surprised last month with similar expectations not being met. Will this new data showing the fortitude of High Street banks give the UK time to hold fire on intervening in UK interest rates until the BoE's next meeting in September.
This will be governing the Pound’s value for the rest of the month and as such will be a heavy focus point for anyone considering buying a foreign currency in the short to medium term.
I strongly recommend that anyone with a foreign currency buying requirement should contact their account manager to discuss their options surrounding what is expected to be an exceptionally volatile week. Opportunities may arise, or some may wish to act quickly if the markets suddenly shift against their favour. However, as long as your account manager is aware of any requirements, then they can discuss the options open to you to limit your exposure and aim to maximise your currency return.
Euro rates beginning to show some fragility of their own
The Sterling section mentioned the recent stress tests conducted on the top 51 financial institutions in the Eurozone. Whilst the UK had a mixed bag with a positive tone, the Eurozone’s was decidedly negative. Many would have seen the recent news about Italian banks suddenly hitting the front pages showing how an unchecked system has led to a debt crisis in Italy. It has come to light that they are hamstrung by around €250bn in bad or doubtful loans.
Italy is becoming the new question mark over the Eurozone that Greece was last year, yet clearly not to the same extent. However, a bailout is being negotiated and further revelations will likely put further pressure on the Euro. We certainly haven’t heard the end of this saga.
Recent growth data reflects this stagnation. Even before the announcement of the UK leaving the EU the Eurozone was found to have grown only half as fast as it did during the first quarter of this year. It seems that the Referendum did not just weigh on the UK’s ability to grow.
Euro buyers should remember why the fallout from the Brexit vote saw GBP/USD fall to a 31 year low but only a 3 year low for GBP/EUR. The news is not positive for the Euro either, which is keeping buying rates close to the average they have been since the financial crisis rather than falling through the floor.
Further economic data will continue to come out this month for both the UK and the EU, creating the characteristic roller-coaster graphs which have been absent with the recent stability in anticipation of this look into economic performance.
As such it is important that if you have a GBPEUR requirement this is detailed to your account manager here at currencies.co.uk. With many potential ‘forks in the road’ a premium this month will be put on being able to act quickly should any tempting opportunities emerge. You will find the brokers here at currencies.co.uk proactive and effective in keeping you up to date on market trends and movements to allow you to make an informed decision concerning your transfer.
US Dollar about to enter a tumultuous campaign season
The US are entering their own election cycle. As we found with the Pound at the beginning of the year in the run-up to the Referendum, the uncertainty surrounding an upcoming vote can become a heavy burden for any currency. Will Donald Trump be that extreme anchor for the Dollar? Frankly he is not the only reason why the Dollar may see its value deflate. The US Dollar is currently being pulled from multiple directions. As a safe-haven currency, it enjoyed an unprecedented period of artificial strength in the wake of the UK’s vote to leave the EU.
Yet the financial turmoil which resulted is now hurting the US, which also heavily depends on its financial services sector for growth. Recent data has shown it is also beginning to suffer since June 24th, and we’re now seeing the Dollar’s value recoil. We are currently 5 cents higher on GBP/USD than the absolute lows recorded in July.
This is why the FED recently chose not to raise interest rates in the US. Originally it was expected that the US would hike rates four times this year. So far we have seen none. There is nothing to justify the current strength of the US Dollar so this must at some point be questioned.
With campaign season in the US about to begin in earnest now that both candidates have been officially nominated, this could be just the spark to see markets begin to address the attractiveness of the Dollar. National polls in the US are close, and with Trump such a divisive and changeable character, his volatile personality will likely translate into volatility on the currency markets before long.
For anyone wishing to move funds from the US Dollar into Sterling, it may be prudent to move sooner rather than later to avoid missing out on an opportunity which many had never expected, even in their own lifetimes. If you have a Dollar requirement later in the year but do not yet have the funds available, you may wish to enquire about a forward contract, which allows you to fix exchange rates ahead of a future purchase. Essentially this allows you to pre-book your currency and move forward knowing exactly what your Sterling return would be.
Australian Interest rate cut weakens the Australian Dollar
We begin the month with the first of a few expected interest rate cuts already having taken place. Australia has dropped their interest rates from 1.75% to 1.5% overnight on Monday, a new record low. Yet the day produced some positive results as well, which is why GBP/AUD didn’t produce the kind of reaction one would expect from such an extreme measure as cutting interest rates. Governor Glenn Stevens gave an emphatic speech that the measure was meant to encourage further lending and to try and bolster the labour market. As such the move was seen as a preventative one aimed at encouraging sustainable growth, rather than a reactive one to prevent disaster.
Stevens will be given an opportunity to expand on his reasons for a cut on Friday as the quarterly statement on monetary policy is revealed. Will this show a more concerning picture that a few buzzwords used to calm markets managed to hide? The Dollar’s value will certainly see further change by Friday morning in the UK.
There are concerning features for the Australian economy, inflation is low and even Stevens admitted it would be ‘low for a while’. Prolonged low commodity prices are also beginning to become telling, with Australia now eagerly looking forward to the respite of the tourist season beginning in a few months.
With Australia as the most popular destination for British expats the net flow of demand is normally to purchase Australian Dollars, so the news of an interest rate cut has been welcomed by most of our customers and will likely keep the Australian Dollar’s value in check as we continue further into August.
With the UK’s own interest rate decision on Thursday however, anyone with an Australian Dollar buying requirement may wish to move sooner rather than later to avoid any risk in seeing the gains made earlier in the week evaporate in the short-term.