Wednesday, 28 September 2016

Pound/Euro rates rise to €1.16

After a pretty poor few weeks for GBP/EUR rates that saw the pair drop to 3 year lows of €1.1480, yesterday saw a slight recovery. It wasn't anything to do with Sterling, as the Pound remains weak on concerns over 'Brexit'. The reason for the gain was a weakening of the single currency due to concerns over the health of Deutsche Bank. Here's how GBP/EUR has moved over the last 24 hours:

As you can see the rate climbed steadily throughout the day before levelling off around the €1.16 mark. There was a general feeling of unease about the banking sector in the EU that weakened the Euro and made it cheaper to buy. Shares in Deutsche Bank plummeted after a demand from the US that it provides $14bn as it mis-sold products. Conspiracy theorists will love this as it comes just a few weeks after the EU asked the US company apple to pay $14bn, and now the US is asking an EU company for the same amount! It does highlight concerns over the health of the EU banking sector however, and that's why the Euro weakened pushing GBP/EUR rates higher.

Anyone looking to place a trade today should be keeping an eye on the ECB president giving a speech at 3.30pm today. The markets will be looking for any comments about the economy and hints at future monetary policy. If what he says is deemed negative, the Euro could weaken further.

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Tuesday, 27 September 2016

Sterling/Euro remains under pressure due to 'Brexit' uncertainty

Sterling has been unable to recover the losses we have seen over the last week, and it remains stuck at around €1.15 vs the Euro, and $1.30 vs the US Dollar. It's a very quiet week in terms of data releases, so with not much else to go on, global investors are shunning the Pound due to continued uncertainty following the EU referendum.

It's starting to look more and more likely that there will be a 'hard' brexit, meaning that rather than try to negotiate remaining part of the single market, the government will give up access to it so that they can impose immigration restrictions. This would also hamper trade, and therefore the Pound is under continued selling pressure.

With the UK government back in action after the summer break, further developments about 'Brexit' could come at any time. If these developments stoke further fears and uncertainty then the Pound could fall further. Looking at recent trends though, and you will see that since the referendum GBP/EUR rates have fallen to €1.15 several times, before recovering and heading higher towards €1.18/€1.19 again. This is because economic data releases had been positive and pushed Sterling higher. With a distinct lack of data this week though, it's hard to see where any good news will come from that would push the rate back up.

Tomorrow (Wednesday) there is a speech by the European Central Bank president Mario Draghi. His comments often move the GBP/EUR rate around. If he is negative about the EU economy and hints at further stimulus measures, it could provide some much needed support for Sterling/Euro exchange rates. Later in the week we have UK GDP figures and services sector data. I expect GDP to show quarterly growth at 0.6%. Any lower than this would likely push the Pound lower again.

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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.

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