Tuesday, 26 July 2016

Sterling falls as BoE set to embark on stimulus measures

Sterling/Euro rates held within a 0.5% range as the trading week started yesterday, with the market remaining relatively stable compared to the recent volatility we’ve seen. We saw the Pound fall slightly during the day after the slightly subdued CBI industrial trends survey, but it didn’t slip much however and had clawed its way back to around €1.1960 by the end of the day. However overnight and this morning, the Pound fell as the chart shows below. This is because the Financial Times reported in early editions that Martin Weale, a BoE rate setter, has changed his stance and indicated that the he favoured the BoE adopting immediate stimulus at their next meeting: 


Markets quiet while investors wait to see actual data 


The market has actually been relatively flat of late, and this is because recent figures such as last Friday’s PMI figures don’t really tell us that much about the actual impact of the Brexit vote. What it showed is that business sentiment is at its lowest levels since the financial crisis of 2008, however it’s worth noting that it was only a measure of sentiment, it’s not an actual measure of real economic activity. It shows that business confidence has been dented, and that there is uncertainty. Business confidence is down, but that’s not really a surprise and actually the overall pace of economic growth is in line with the trends we’ve seen before the vote on 23rd June. It doesn’t really tell us much about what Brexit’s longer term impact is actually going to be, and that’s why GBP/EUR rates remained relatively stable.

What’s key for Sterling is that we will soon start to see economic figures that are from the post Brexit period, and they may well illustrate a softening in the economy. Many will be watching this very closely, in particular the Bank of England who recently decided to hold interest rates. There seems to be some disagreement amongst the Monetary Policy Committee’s (MPC) 9 member rate setters, however the data available so far seem to be sufficient for further monetary easing at their next meeting in early August, and if this happens the Pound is likely to fall again, as supported by the fall in Sterling this morning. At the moment, there is a little more political stability in the UK which was unexpected and has calmed the currency markets somewhat, however the coming days and weeks could well reveal economic uncertainty that could bring the Pound back under pressure. I think that we’ll see 2 interest rate cuts before the end of the year, and this could start being priced into the value of the Pound this week if economic data releases do show Brexit starting to have an effect on the economy.

Other events further afield 


You would be forgiven in thinking that the UK has been at the centre of the world in recent weeks, however there are other important events that will also have an impact on exchange rates. This week the G20 meeting is taking place, and G20 finance chiefs yesterday said they would use all policy tools to left global growth. This should help calm the markets slightly and certainly helped EU and UK stocks yesterday. We will also see European Bank stress tests this week, and that could have an impact on the value of the single currency and so could affect GBP/EUR rates. Japan may well be about to embark on a huge chunk of stimulus later this week that could affect global currencies such as JPY, USD, GBP and EUR. And let’s not forget the FED’s policy announcement from the USA on Wednesday. So the current stability in the market is probably the case of investors waiting for some of these major events to see some kind of direction. Don’t expect things to stay quiet for long.

Making sense of the currency markets and when to fix a rate of exchange 


As you have seen in today’s report, there are many things happening at the moment affecting various currency pairs, and the currency markets can often be susceptible to large price swings in a very short space of time. There are lots of different things playing out across the globe, from the immediate economic events I’ve outlined above, coupled with terrorist attacks, military coups, and severe weather events, all of which can combine and move exchange rates, often without warning and by a large margin.

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