Print Posted By Lost in France on 30 Oct 2017 in Living in France - Banking

Weekly Currency Report

Weekly Currency Report

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GBP/EUR

The Sterling to Euro exchange rate has been a little more settled of late, but the Pound has suffered as talk of Brexit has seeped into every pore of the UK media. Negotiations between the UK and EU over the shape and size of the Brexit agreement have begun and everyone has a better solution than the UK government apparently.

It seems highly unlikely a final deal will be possible within the next 18 months; some form of interim or transitional period appears more likely. Nevertheless, a scoop-hungry media is desperate for detail when the negotiators are keen to keep their cards very closely guarded. Whilst this carnival continues, the Pound has declined and the Euro has regained some of the strength it lost during the Dutch and French elections. There are German elections in September and another bout of Euro weakness cannot be ruled out as that period approaches. In this report, we will look at some of the major influencing factors and offer some thoughts on the likely implications for this exchange rate.

Brexit and Politics

The Pound was damaged by the poor showing from the Conservative Party in the hastily arranged UK election. Theresa May did hang on to her keys to 10 Downing Street, but only by the skin of her teeth and the precarious nature of her tenure is giving cause for concern. The opening salvos have been fired on both sides of the Brexit negotiations and, inevitably, there is still concern over how implacable the EU side will be towards the UK. That will maintain pressure on the Pound until we see more substantial detail of the nature of the final deal and no one knows when that will be.

Sterling did recover some of its post-election losses but is on the back foot again as nervousness remains over the ability the UK has to negotiate the thousands of lines of trade and EU agreements that need to be dealt with before 2019…officially. Business sentiment indices remain in positive territory, the UK has almost full employment with the unemployment rate down at 4.6% and, whilst wage inflation is still subdued, full employment tends to inflate wages. Add to this stronger retail sales and inflation above the Bank of England’s mid target of 2.0% and the UK looks to be in good shape. The major lagging indicator for the UK is productivity, which still trails other industrialised nations. There can be little doubt that, were it not for the Damocles-like trepidation Brexit holds, Sterling would be far stronger. Anything that relieves some of that tension will allow the Pound space to recover somewhat.

Central Banks

The other factor that is causing volatility in the GBP-EUR exchange rate is the activities of the UK and EU central banks. The Bank of England appeared to be edging towards an interest rate hike after two of the reduced eight members of the Monetary Policy Committee voted for that, but Bank of England (BoE) Governor Mark Carney downgraded the Bank’s growth forecasts for this year and next when the Bank met on 3rd August. Those downgrades would still see the UK economy growing at a healthy pace just below 2% per annum and many countries would give their right arms for growth like that, but the market perception is negative; and the Pound was hit hard.

On the other side of the Channel, the European Central Bank is still trapped by the disparity between member states. The German economy could certainly wear an interest rate hike without too much fall out, but their exporters would moan. Gross Domestic Product (GDP) growth in the southern states is still meagre and unemployment and consumer activity remains a real cause for concern. So any rate hike could have dire repercussions for Greece, Spain, Italy and Portugal.

However, the European Central Bank (ECB) may choose to reduce their bond stockpile, drawing money out of the financial markets, and that would also have a knock on effect. Share prices in and outside Europe have been buoyed by the ECB cash bonanza and the Euro has also fared well, while money has been in plentiful supply. Any reduction is likely to knock shares and weaken the Euro, so the ECB needs to tread carefully.

GBP - EUR forecast

For over a year, the Sterling – Euro exchange rate has traded in a sideways pattern. €1.20 marks the top of that range and, barring a postreferendum dive, the €1.10 level has marked the bottom of the range. It is rather too neat at 10 cents top to bottom, but the Pound is hugging the bottom of that range at the time of writing. It would appear that the knee-jerk reaction to the BoE’s growth downgrades has been overdone and Sterling could well make gains through August as we head towards September’s German elections.


USD

The US Dollar has had an interesting time of late, too. For a while, downbeat data and uncertainty around whether the Federal Reserve plans to raise interest rates again – and what it plans to do about its monetary stimulus policy – have weighed on the US currency. While the US Dollar was trapped against its major currency pairing of the Euro and has been hovering at similar levels against its other counterpart, the Pound, some time, things are now looking up for the US Dollar as the Euro contends with its own economic and political issues and US economic data improves.


CAD

The Canadian Dollar has recently fallen, following disappointing inflation and retail sales data, losing out in particular to the strength of its other key currency pairing, the US Dollar. The Canadian data was forecast to be strong, so this has caught the usually relatively buoyant Canadian Dollar off guard.

The Bank of Canada has been taking a more cautious approach and kept interest rates the same this time around. This tentative sentiment has weakened the usually sturdy Canadian Dollar against both the Pound and US Dollar.


AUD

The Australian Dollar has had a bit of a bumpy ride itself this quarter, as political and economic influences have weakened the Australian, strengthened it and then weakened it again. As a currency so closely linked to Asian markets and commodity prices, recent events have certainly made an impact, including the nuclear threats from North Korea as well as dramatic changes in fuel prices and an improvement in Chinese demand.


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