Friday, 23 September 2016

To cut or not to cut? That is the question.

Sterling received a slight lift during trading yesterday, after there was doubt cast on whether the Bank of England will indeed have to cut interest rates before the end of the year as many had been expecting. Before we get into the details, let’s first look at why interest rates affect exchange rates.

Higher interest rates attract foreign investment increasing demand for a country’s currency. Conversely, lower interest rates make the country’s currency less attractive, reducing demand and weakening a currency. It’s a little more complicated than that as you have to factor in inflationary effects, but in simple terms, the prospect of lower interest rates weakens the Pound, which is what we’ve seen since the BoE recently cut interest rates.

There was much speculation that there would be another rate cut before the end of the year, however yesterday one of the BoE’s rate setters, Kristin Forbes, said the cut in August should be enough to stop the economy sliding towards a recession. It’s interesting that she made the comment, as she is widely regarded as the most hawkish member of the committee. She’s also professor at MIT and an expert on financial crises, so knows what she’s talking about. She added that the economy is “experiencing some chop, but no tsunami”.

Using nautical terms, she likened the situation to a fishing boat, saying that “The fishermen in the boat need to stay vigilant, and may already be a bit seasick from the chop they have already encountered, but if the current weather continues, they should be able to sail home without more aid”

Sterling rally unlikely 

This gave the Pound a much needed lift, but the gains were limited due to the continued uncertainty over the long term effects of Brexit. This morning rates have slipped back to the €1.16 mark showing the inherent weakness in Sterling at the moment. Those looking to buy Euros may wish to look at locking in a rate of exchange to protect against further falls in the exchange rate.

Looking forwards, I think next week will be very important as we’ll see Services sector data for the post-Brexit month of July. We’ve already had things like Manufacturing and Retail numbers showing robust performance, however the services sector form a much, much larger part of the economy, more than 75%! These numbers are therefore the first real test of how the economy is faring. It could send the Pound in either direction, so it’s not all plain sailing for Sterling, and there remain choppy waters to navigate for Forbes, her shipmates and indeed anyone with a requirement to convert currency.

Those with an exposure to the currency market, be it for small transfers to a foreign bank account, or large conversions for property purchases or corporate requirements, should get in touch today to discuss how exchange rates may be affected in the coming months, to put together a strategy to ensure you make the most of your currency.

Today’s Data 

There’s no data of note from the UK today. In Europe we have a range of inflationary measures that could affect GBP/EUR rates. Canada also releases inflation numbers and Retail Sales that could affect GBP/CAD. Over in the states there are manufacturing figures.

 It’s worth noting that despite a lack of UK data, don’t expect the Pound to remain flat later this afternoon, as we may see Sterling weaken due to end of week flows. Global investors tend to bank their profits and hold them in stable currencies over the weekend period, and the Pound is not the preferred choice at the moment for obvious reasons. It used to be, and Friday afternoon’s used to see the Pound gain, however the USD is favoured at the moment, so flows into the USD could therefore weaken the Pound as we’ve seen happen in recent weeks.

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Thursday, 22 September 2016

Central Banks, Interest Rates, & Exchange Rates..

The Federal Reserve left interest rates on hold as expected last night which has given the Pound a little support, but not much.  The Pound was at a 5 week low, but has steadied a little. The FED did hint that a further rate rise is on the way before the end of the year, but there tone was a little dovish. This also weakened the USD and pushed GBP/USD up towards the $1.31 mark.

Central Banks, Central Banks, Central Banks.... 

Last night it was the US Central Bank that was the driver in exchange rates. Today, it's the UK and EU central banks. At 2pm the ECB president Mario Draghi gives a speech. Often his comments affect the Euro, and if he sings the praises of the EU economy and settles investor's nerves, then expect the Euro to gain strength pushing GBP/EUR lower.

Later at 6pm, it's the turn of the BoE governor Mark Carney to give a speech. We'll be looking for any hints at further rate cuts for the UK later in the year. If we get them, again the Pound is likely to remain under pressure.

Despite the slight gains for the Pound in the last 24 hours, I expect them to be limited. As I said earlier this week, the effect of the EU referendum on the economy is sharply back in focus after the Chancellor hinted he would give up access to the single market. The uncertainty about 'Brexit' hasn't gone away, and make come into closer focus in the coming weeks, keeping downward pressure on the Pound.

Why do interest rates affect exchange rates?

It's all to do with global investors moving funds around the world. Because the US are likely to raise interest rates again, the USD becomes attractive due to the higher return. Therefore, investors move funds to the USD to get a better yield. Vice Versa for the Pounds, as because the BoE may cut rates, Sterling is not attractive and therefore is sold and weakens. So in a nutshell, the rumour of higher rates strengthens a currency, and the rumour of lower rates weakens a currency.

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Wednesday, 21 September 2016

Sterling stable ahead of FED decision

The Pound has stabilised a little today helped by slightly better Public borrowing data. It hasn't helped a great deal however, and Sterling currently sits around the mid €1.16's vs the Euro and $1.30 vs the US Dollar. (view live graphs).

US FED Interest Rate Decision

Tonight at 6pm the USA will announce its rate decision, along with a policy statement and economic prediction. There has been rumours that the US will be raising interest rates again this year, but I don't think they will do it today. If however they hint at a cut perhaps in November, the US Dollar should gain strength pushing GBP/USD rates lower.

Although this event is over in the states, it could still move GBP/EUR rates. If investors expect higher rates over in the states, it makes the US Do

llar more attractive. These investors will then move funds to the Dollar in order to get a better return. If these investors are currently holding Euros, we will see the Euro weaken and the Dollar strengthen, which might give Pound/Euro rates a little lift, but don't expect too much.

UK Economy after 'Brexit'

The Office of National Statistics (ONS) said today that the referendum has had little to no impact on the economy, so far. Indeed that's why the Pound hasn't fallen further in recent months as things like exports, manufacturing and production all performing well.

However they have also warned that we haven't seen figures from the Services sector for the post Brexit Period yet, and these are due next week. I think these will be very important, as this sector accounts for more than 75% of the economy. The July numbers are out next Friday.

It will be a key indicator of how the economy is faring, and GDP figures are released the same day. It think it's going to be a very important day and likely to drive direction for Sterling exchange rates. If the numbers are poor, the Pound is likely to fall. It's going to get more interesting in the coming months as the markets digest what all of this means, so expect the currency markets to remain extremely volatile and subject to sharp price swings.

If you want to move one currency to another on a bank to bank transfer basis, then get in touch to discuss how we can help you.

Tuesday, 20 September 2016

Sterling goes from bad to worse

In yesterday's post I said that there was nothing on the agenda that would move Sterling, other than continues concerns over 'Brexit' and this has proved to be the case. There have been no economic data releases of note today, however the Pound has been in decline all day, dipping into the €1.15's vs the Euro, and below the $1.30 mark vs the US Dollar. Here's how GBP/EUR has fared over the last few weeks:

As you can see, the rate has slipped by around 4 cents so far. The reason is simply the concerns, both political and economic, surrounding the UK's exit from the EU. In the month's following the vote, the UK economy seemed to be riding out the immediate shock pretty well, and certainly the disaster many were predicting didn't materialise, however the Pound is now starting to suffer. I mentioned yesterday that there were rumours that the UK would give up access to the single market in order to impose immigration restrictions. This is pushing the Pound lower, as it has serious implications. If we leave the EU trading area, then it risks our Financial Services industry being able to continue trading freely, and these services make up 10% of our economy as a whole.

If true, it could be a very clever negotiating tactic, as it's the main starting point for those in Europe who have said if we want to remain part of the EU trading block, we have to accept all the other rules that go with it. If we start our negotiations based on the fact we don't expect to have free trade, it removes all the decent cards the EU holds. There's no reason we can't just trade with the EU anyway, and simply pay tariffs as we do with the rest of the world. It would therefore give us a much stronger negotiating position. It's certainly going to be an interesting few months ahead, so watch this space.

In the short term, will the Pound fall further?

This week there's hardly any data to move rates, which is why Sterling has probably been affected more than normal by these Brexit rumours. Tomorrow will be important, as any direction the FED give to future interest rate moves can also affect the Pound. If they hint at a further hike, then given the UK have hinted we're cutting our rates again soon, investors will dump the Pound and buy the Dollar, so there is potential for the Pound to fall further still.

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Monday, 19 September 2016

Could Pound fall further against the Euro?

Good afternoon.  The Pound hasn't started the week very well, starting the day in the mid €1.16's against the Euro, and sitting down at $1.30 vs the US Dollar. Sterling has made about a 0.5% gain so far today, but no significant gains are expected, due to the ongoing uncertainty due to the EU referendum. (Click here for live currency graphs).

There are also rumours that the chancellor Philip Hammond is going to give up access to the single market, in order to impose immigration restrictions. If true this means the government will put immigration ahead of EU market access, which won't do anything to ease investors' concerns and will only add to the uncertainty, which could seriously weaken the Pound further.

Hans Redeker, head of currency strategy at Morgan Stanley said that "Things look increasingly messy and with the UK government not defining a clear position concerning its exit strategy uncertainties will remain high. What matters for sterling is the medium-term investment outlook and here the outlook is negative."  There could be troubled waters ahead for Sterling and this increases the chance of exchange rates falling much further.

This week, I think it could be a fairly quiet one for Sterling, due to a lack of any significant data releases from the UK. However anything unexpected such as further information about our access to the single market could unexpectedly alter the value of the Pound.

Below I've listed the main economic releases for the week that could affect GBP/EUR, GBP/USD, GBP/AUD, GBP/NZD and GBP/CAD. If you need to exchange currency and would like to get a quote, or simply discuss with me forecasts for the currency pair you're looking at, click here to send me a free enquiry today.

This week's data releases that could affect exchange rates

Tuesday 20th September - There's no data of note from the UK, and the only thing on the agenda that could affect GBP/EUR rates is Inflation figures from Germany, Europe's largest economy. From the US we have Housing data. Australia also releases housing data, along with the minutes to their latest policy decision. This could have an impact on any clients looking at GBP/AUD.

Wednesday 21st September - Public sector net borrowing figures are released from the UK today, expected to show a deficit of £10.3bn. If the number differs from this forecast, expect Sterling exchange rates to be affected. The most important release today however is the eagerly anticipated interest rate decision from the Federal Reserve. The US is expected to raise rates at some point this year, but I don't think it will happen today. Any hints of a hike later in the year however would likely send GBP/USD lower. There is also an interest rate decision from New Zealand today that could affect GBP/NZD rates.

Thursday 22nd September - A quiet day again for the UK with no releases of note. However the ECB president Mario Draghi is giving a speech. The last time he spoke, his comments caused GBP/EUR rates to drop sharply as their positive tone strengthened the Euro. An economic bulletin is also released today from the EU. Elsewhere, US jobless claims could move GBP/USD rates.

Friday 23rd September - Another quiet day for Britain, but Europe releases a range of inflationary measures that could cause the single currency to change in value. There's also a speech by an RBA member from Australia that could change GBP/AUD. Canada also releases inflation figures today that could alter GBP/CAD exchange rates.

If you are looking for the best exchange rates, or would like an expert's view on which way exchange rates may go, then complete the form below or click here.