Good morning readers. Apologies for the blog being quiet for the last fortnight; I’m just back from a few weeks in Fuerteventura, and so today I will take stock of how the major currency pairs have performed over the last few weeks, and take a view on what the forecast is for Pound/Euro rates along with other major currencies.
In addition to looking at the outlook for Sterling exchange rates, I’ll list the main data releases for the next week that may affect exchange rates. In this week’s report:
- UK Interest Rates to remain on hold for foreseeable future
- Will Pound/Euro rates rise or fall this summer?
- Pound/Dollar rates drop below $1.50 before recovering
- Central Banks likely to continue Quantitative Easing
- Pound held back despite better economic data
How has Sterling performed, and where are GBP/EUR rates headed?
In the last few weeks, the pound had fallen sharply against other currencies after the Bank of England warned that markets were wrong to assume that it would start raising interest rates soon. The fall came just over a week ago when the Bank of England held interest rates at 0.5% and kept its quantitative easing programme (QE) unchanged, which was expected.
The decisions were made at the first meeting of the Bank's Monetary Policy Committee since Mark Carney took over as governor from Sir Mervyn King. Next Wednesday we’ll see how the members voted, and whether Carney followed King on voting to increase its asset purchasing programme. The MPC said that the recovery "remains weak by historical standards and a degree of slack is expected to persist for some time".
With interest rates expected to remain low for longer and the chance of more monetary stimulus, the pound became less attractive on currency markets, sending sterling lower against other currencies and pulling rates down.
The pound also fell sharply against the euro, but has now recovered somewhat after the European Central Bank committed to maintaining its interest rates at or below their current level for an "extended period of time", sending the euro lower against all currencies.
Releasing a statement alongside the decision is new; Mervyn King didn’t used to do that. IN doing so despite there being no change in policy is significant, as it suggests that further quantitative easing is likely and interest rates will remain low for the foreseeable future. This will keep the Pound weak.
Many of my clients are expecting rates to rise, and if you take the recent improvement in economic data from the UK alone, I would agree. However the markets are more complex than that. Sterling is being held back global investors, as the view is that the British currency will continue to offer very little return of interest. Couple this with the threat of more QE along with low interest rates, and I would expect rates to fall in the next 3 months, before recovering later in the year.
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Pound/Dollar rates drop below $1.50 before recovering
The pound didn’t just fall against the Euro – in the last few weeks it fell below $1.49 against the dollar, close to a three-year low, as markets digested the prospect of UK interest rates staying at 0.5%, and the strengthening US economy. The slide began with the Bank of England saying rates could stay flat.
In other news last week, we saw that US employment grew by 195,000 in June gave the dollar more support, pushing rates lower. We have since seen rates climb back above the $1.50 level, but we will have to wait and see whether it will stay there.
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Economic Data releases for the next 7 days
Every day economic data is released across the world, and is often the most common thing that affects exchange rates.
Below I list the main data releases for the coming week that I think could affect exchange rates. For a free consultation on how these released could affect your particular currency requirement, send me a free enquiry now by clicking here.
Monday – It’s a very quiet start to the week, with no data of note from the UK or EU. Over in the States, we have Retail Sales which are a good overall barometer of economic activity. In New Zealand we have inflation numbers which could dictate future interest rate movements.
Tuesday – In the UK today we have a raft of inflation numbers, Retail Sales, the Bank of England inflation letter and a speech by one of the MPC members, so a few things that could affect the value of Sterling. In the Eurozone, inflation numbers come at 10am followed by Trade Balance numbers. There are also measures of Economic sentiment from Germany. In the USA we have further inflation numbers along with industrial production figures.
Wednesday – Today is the most important one for Sterling. Firstly we have the Bank of England minutes showing the voting and discussion for QE. Released at the same time are the latest unemployment figures, so I expect a choppy day for the Pound. There is nothing of note from the EU. In Canada we have an interest rate decision, and in the USA we have figures from the housing and building sectors.
Thursday – The only UK data of note today is the latest Retail Sales numbers. In the United States we have unemployment and jobless numbers, along with some manufacturing figures.
Friday – We end the week with German Trade Balance Data, UK Public Sector Borrowing and inflation numbers from Canada
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