Wednesday, 5 August 2015

Exchange Rates volatile due to interest rate speculation

Wednesday 5th August 2015
There was some movement on both GBP/EUR and GBP/USD exchange rates overnight, and it’s interest rate speculation again that’s driving exchange rates. After a quick look at the charts I’ll explain what’s going on. As you can see below Sterling/Euro rates have climbed to €1.4350 and Sterling/Dollar rates dropped a cent overnight: 

Sterling/Euro

Sterling/Dollar

GBP/USD - US Interest rates affect exchange rates 

Last night, one of the US Federal Reserve members, Dennis Lockhart, who is one of the people who decides on interest rates, said that it would take "significant deterioration" in the U.S. economy for him to not support a rate hike in September. This means that chances are increased that the USA will be the first major western economy to start pushing rates back up. The hint of higher interest rates tends to strengthen a currency due to the higher return on offer for investors. 

On the comments, the USD gained strength and pulled GBP/USD Rates down. As investors moved funds from the Euro into the Dollar, the single currency weakened accordingly, and as you can see from the graphs above, the GBP/EUR rate moved inversely to cable, rising by over 1% to €1.4350. 

On Friday, we see some very important jobs data from the USA at 13:30pm, and if these numbers beat forecasts, expect the decline in GBP/USD rates to continue. I am still of the view that GBP/USD rates won’t stay above $1.50 for very much longer. 

GBP/EUR – Thursday very important for exchange rates 

With many analysts now expecting the US to raise interest rates next month, many are also starting to look at whether the UK will do the same. Tomorrow (Thursday) is a very important one for the Pound. Here is the data we’re going to see from Britain: 

‘Super’ Thursday’s eco-stats include: Manufacturing Production, Industrial Production, a GDP growth estimate, the BoE decision on interest rates, the BoE Inflation report, a Statement from the BoE’s Monetary Policy Committee, and a Speech by the BoE governor Mark Carney. 

Phew. There’s a huge amount of data to chew on tomorrow, and taken as a whole will paint a very clear picture on what direction the UK economy is taking. I think that at least 2 of the 9 member MPC committee will vote for an interest rate hike, and if this happens and the other data is good, expect Sterling to gain in strength. We could well see a decent rise for Sterling exchange rates if the UK economic picture is a robust one. 

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