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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