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Euro Nears 2-Week High Versus Pound, as Germany Seeks Grand Coalition

Image credit: Nimalan Tharmalingam.

by Peter Lavelle

Welcome to Pure FX’s weekly summary plus outlook of the interbank exchange rates.

Pound to euro

Sterling stumbles versus the common currency! The pound to euro interbank exchange rate fell -0.75 cents last week, to 1.1175, a 2-week low.

The pound lost out last week, first because the UK's Office for Budget Responsibility forecast that UK GDP would expand by -0.5% less than previously forecast in 2017, by +1.5%. What's more, the OBR also downgraded its predictions for UK growth for the coming years, as well as UK productivity. In addition, UK business investment rose less than hoped for in Q3, weakening sterling too!

Meanwhile, the euro stood taller last week, first because Eurozone business activity expanded at the fastest pace in 6.5-years in November, according to IHS Markit. In particular, both jobs growth and manufacturing activity in the common currency bloc hit 17-year highs this month. What's more, Eurozone consumer confidence reached its highest since January 2001, thus lifting the euro too!

Outlook

What's more, looking ahead, the pound to euro interbank exchange rate could fall further. This is because, first, Germany's Social Democrats have agreed to hold coalition talks with Chancellor Angela Merkel, to form a government. This could break Germany's ongoing political block, and thus lift the euro. Meanwhile, sterling may struggle, as the UK's Brexit bill deadline is drawing near!

Pound to Swiss franc

The pound to Swiss franc interbank exchange rate plays dead lions! Sterling held around 1.3050 against the franc last week.

The franc was tranquil last week, first because Switzerland's industrial production jumped by +8.6% in Q3, well above forecasts. What's more, Switzerland's economy is forecast to expand above trend in coming years. Yet on the other hand, Swiss National Bank chairman Thomas Jordan said in a speech last week that the franc remains 'highly valued,' thus cutting the odds for higher interest rates.

Pound to US dollar

Sterling shoots and scores versus the greenback! The pound to US dollar interbank exchange rate jumped +0.75 cents last week, to 1.3325, its highest since October 1st.

The US dollar lost out last week, chiefly because the Federal Reserve, America's central bank, is concerned about the outlook for US inflation. In particular, Fed chairwoman Janet Yellen said last week that it's a 'mystery' why inflation remains below the Fed's 2.0% target. In turn, if US inflation stays below 2.0%, the Fed is less likely to lift interest rates, thereby dragging down the dollar!

Pound to Australian dollar

The pound to Australian dollar interbank exchange rate sticks to its guns! Sterling held between 1.75 and 1.7550 against the Aussie last week.

The Australian dollar stayed put last week, first because, on the bright side, construction work Down Under rocketed by +15.7% in Q3, trashing forecasts for -2.1%. Yet on the other hand, the Reserve Bank of Australia looks set to keep interest rates stable at 1.5% for the foreseeable future, as the RBA is concerned about subdued wage growth and inflated house prices in Australia.

Outlook

What's more, looking ahead, the Australian dollar could slide. This is because the International Monetary Fund (IMF) has warned that Australia is growing only at a 'modest pace', and that 'Australia’s recovery is lagging that of other major advanced economies.' Given this, the IMF recommends that Australia keeps interest rates low for longer, unlike in the UK, USA or Canada.

Pound to New Zealand dollar

Sterling sticks to its guns versus the kiwi! The pound to New Zealand dollar interbank exchange rate stuck around 1.9350 to 1.94 last week.

The kiwi dollar held steady last week, first because, on the bright side, New Zealand's exports zoomed up to +NZ$4.56bn in October, as kiwi firms shipped more dairy and lamb. In turn, this shrunk New Zealand's trade deficit down to -NZ$871m. Yet on the other hand, global dairy prices fell for the 4th consecutive auction last week, by -3.4%, which may weigh on NZ dairy exports!

Outlook

That said, looking forward, the New Zealand dollar may struggle. This is because, first, New Zealand retail sales rose by just +0.2% in Q3, below hopes for +0.4%. What's more, foreign investors remain cautious toward New Zealand's new Labour government, which plans to limit foreign home ownership, and reform the RBNZ to target low unemployment. So the kiwi dollar could tumble!

Pound to Canadian dollar

The pound to Canadian dollar interbank exchange rate stays steady! Sterling held between 1.6950 and 1.70 last week, close to its highest since November 1st.

The Canadian dollar was steady as she goes last week, first because Canada's retail sales rose just +0.1% in September, well below forecasts for +0.9%. Overall, Canada's retail sales have now been broadly flat since June, pointing to a consumer slowdown. Yet more positively, Statistics Canada reported that Canada weathered well the 2014-2016 slowdown in the oil price, Canada's biggest export.

Outlook

That said, looking ahead, the Canadian dollar could drop. This is because, first, Canada has the highest household debt in the OECD, at over 100%. According to the economics body, this 'does increase vulnerability to shocks' for Canada. What's more, with consumer spending flat, Canada's GDP growth may slow, meaning that the Bank of Canada looks likely to keep interest rates at 1.0%.

Pound to South African rand

The pound to South African rand interbank exchange rate stays within range! Sterling stuck close between 18.5 and 18.75 against the rand last week.

The South African rand dug in its heels last week, first because the South Africa Reserve Bank (SARB) held interest rates at 6.75%, defying predictions for a cut. What's more, the SARB forecast that rates would rise by +0.75%, by the end of 2019. Yet on the other hand, South Africa's political fate is up in the air, ahead of the ANC's December vote to replace president Jacob Zuma.

Outlook

That said though, looking ahead, the South African rand could slide. This is because, over the weekend, credit rating agency Standard & Poor's cut South Africa to Junk, while Moody's put South Africa on review for a downgrade. This makes South Africa a riskier place to invest for international investors, which could lift South Africa's cost of borrowing in future, and drag down the rand!

Pound to Japanese yen

Sterling stays put versus the yen! The pound to Japanese yen interbank exchange rate held between 148.40 and 148.70 last week.

The yen ended last week where it started, first because the Nikkei manufacturing PMI hit 53.8 this month, a 3-year high. In particular, 'new orders increased strongly, underpinned by business from abroad,' according to IHS Markit's Joe Hayes. Yet less positively, Japanese manufacturers reported that they could only raise their prices slightly, pointing to continuing low inflation in Japan.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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