February provided a second consecutively testing month for anyone considering making a foreign currency purchase using Sterling. January was not an anomaly, it seems 2016 will unlikely be seeing the same degree of Pound strength that we were spoilt by in 2015.
The silver lining is that the start of March has finally begun to see some relative stability brought to Sterling. The lows of February have still been tested and, on some occasions, breached, but the jaw-dropping slides to which many have become accustomed are no longer a regular feature.
The big talking point this month was the EU referendum. Cameron negotiated, Cameron got a deal he thought was widely palatable, Boris gave him a rude awakening.
Politics are now playing a larger part in currency exchange movements. There will be a large question mark over the UK until June, but the interim may still see opportunities emerge for those wishing to buy foreign currency.
Sterling and the ‘BREXIT’ – SPECIAL REPORT
Understandably the most frequently asked question I have found myself answering in recent weeks is how the outcome and run-up to the Referendum will affect Sterling. Unfortunately there is no real precedence for how an event like this has affected the value of the Pound in the past. But recent market reactions and similar events such as the Scottish Referendum have given many analysts a consensus on what to expect.
The weekend of Cameron’s deal being announced to the British public hinted heavily at how a Leave or Remain vote will sway the Pound’s appeal to global markets. When the provisional EU deal was in place on the Friday evening, Pound buying levels rose by 1% in the space of an hour before the financial world closed for the weekend. The drama over the next few days which saw a near-rebellion in the Tory ranks, culminating in the high profile support of Boris Johnson for the ‘Leave’ campaign, then saw the Pound tumble when markets re-opened the following Monday.
Currency markets rarely respond well to changes in the status quo. We saw this in the Scottish Referendum where close polls in the run up to the vote saw Sterling’s value fall by 8%.
There will certainly be a question mark over the Pound until June 23rd which will make it an unattractive prospect for investors globally, so Sterling will have a rough time finding traction on the currency markets until then even with positive economic news, such as our current record employment levels.
In this situation where political events and maneuverings can have an undue sway on Sterling’s value against all of its currency pairings, it is best to be in a position to move quickly lest any sudden slides or opportunities are missed.
I strongly recommend that foreign currency buyers should detail any requirements you may have between now and June, your experienced personal broker will be able to explain the options open to you to minimize your risk. Furthermore, they are plugged into UK markets from the moment curtains are drawn until close of play at six o’clock, enabling tempting opportunities to be relayed to you immediately.
Euro enjoys strength after dismissing negative interest rates
In the wake of the recent global slowdown, the central banks of many major powers have been discussing the potential for negative interest rates. This is a tool to stimulate the economy by encouraging spending. Why put money in the bank when you are paying for the privilege? Arguably one of the most important determinants of a currency’s value is the current capital interest paid to its holders. Which is why the notion of negative interest rates causes the financial community to be apprehensive.
The Eurozone Central Bank is one of the entities markets we\'re worried about. Before their most recent meeting last week GBP/EUR had already begun to slide with the potential for the Eurozone’s paltry 0.05% rate could suddenly have a minus sign in front of it.
Rates were cut, but only to 0%.
GBP/EUR weakened marginally on the news, but the 1.3 Cent gains for Euro buyers quickly turned into 2.6 Cent losses in a rollercoaster afternoon for anyone with a vested interest in the single currency.
This was due to the press conference following the cut in which Mario Draghi, the President of the ECB, categorically dismissed any speculation that the Eurozone will experiment with negative interest rates.
The small cut was simply as a precaution and was not reflective of future policy. It seems that Euro buyers will continue to wait for the same kind of extreme crises in 2015 which allowed for record buying levels on GBP/EUR.
For significant improvements in buying rates Euro buyers will have to look to Sterling strength for a bump in the right direction. However, the article above suggests this will be another tough ask until well after the June Referendum.
Anyone with a Euro requirement who are worried about future movements affecting their transfer costs can fix the current exchange rates using a forward contract and move forward knowing exactly what your exchange will be costing you.
US Dollar losing its recent momentum
Interest rates are still the main topic of conversation surrounding the Dollar, despite Donald Trump’s entertaining attempts to steal the spotlight.
An interesting poll by the Economist Intelligence Unit suggests that a Trump presidency is now rated among the top 10 global risks. Up there with ISIS and a Brexit sparking a full break-up of the EU. But unfortunately for Dollar buyers, we won’t really see this affecting GBP/USD rates for the better until closer to November. The Dollar did, however, finally cheapen this week after a short time below 1.40.
After making recent history by being the first country to raise interest rates since the financial crisis, the Federal Reserve had made the bold claim of potentially four further incremental hikes.
However, by March was can already see that this was not a binding promise. Interest rates were kept on hold and the accompanying monetary policy statement has revised the hike tally down to two.
The first few months of shocks in the financial markets, most notably emanating from China, have certainly taken away the confidence that the economy can handle a hike.
With both the Pound and the Dollar both almost in a state of limbo, the Pound waiting for domestic politics to be swept aside, and the Dollar waiting for the international economy to stabilise, the rest of the month will likely see weakness on both sides, with further gains and losses keeping GBP/USD rates within the current resistance levels between 1.41-5 seen in the past few weeks.
I strongly recommend that Dollar sellers and buyers alike should get in contact with their personal currency broker to detail any upcoming currency requirements, and you can be contacted as and when tempting levels present themselves.
Australian Dollar moving to 12 month highs against the Pound
The Australian Dollar has shown remarkable resilience since the start of this year in the face of steep falls in commodity prices and worsening news coming out of China.
The storm now seems to have been weathered, largely thanks to a near-record tourist season keeping capital flowing into the economy. Now the commodity markets are picking up, a boon to the Australian Dollar due to its reliance on the mining sector, and China (an important trading partner) has been relatively stable since January. Combined with the recent slowdown in the UK and the political uncertainty surrounding a potential Brexit, GBP/AUD is now at 12 month lows.
The next few months will be interesting. The Australian economy is still performing relatively well compared to the UK whose growth is coming into question, yet poor Chinese news and its impact on the Dollar has almost become a cyclical phenomenon.
August in the first instance, January in the second, how long we will have to wait to hear another crisis and spark a rout on the Dollar similar to further benefit those holding Sterling?
I would not suggest depending on another sudden crisis to improve your transfer this month. China gives few glances to the outside world into its economic performance, but what has been released has shown stability rather than further contractions.
The economic and political setting which has caused the negative trends since the middle of January are heavily is still in place. As such, it seems the current market is still presenting more risk than opportunity, and any further deterioration in the Chinese market for Australian exports may struggle to regain any losses expected in the short term whilst Dollar buyers wait for this to occur.
Those with a GBP/AUD requirement and are worried how future movements may affect their transfer should be made aware that there are multiple options open to you to fix rates of exchange if funds are not available currently in order to manage your risk in a volatile marketplace.
To keep track of current exchange rates visit our live foreign exchange rates page. Alternatively you can contact any of our currency brokers on 0044 1494 725353.