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GBP Slips Versus EUR and USD, as EU Publishes Brexit Transition Draft

Image credit: Sam Savine

by Peter Lavelle

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

This tells you what’s affected the exchange rate in the past week, and what may happen next, for your money transfer!

Pound to euro

Sterling drops versus the common currency! The pound to euro interbank exchange rate sank -1.75 cents last week, to 1.12.

The pound fell last week, chiefly because the EU released its draft Brexit transition deal, in which the EU ignored several UK demands. For example, the EU prefers the transition period to end in 2020, while the UK wants it to be open-ended. In addition, the EU said that Northern Ireland may end up in a customs union with Ireland, which would threaten the UK's constitutional integrity!

Meanwhile, the euro triumphed last week, because the Eurozone economy remains robust. For instance, Eurozone manufacturing hit 58.6 in February, according to IHS Markit's closely-watched survey, close to a record high. Furthermore, German unemployment fell -22,000 in February, beyond financial market forecasts for a -15,000 drop in joblessness. So this news has lifted the euro!

Outlook

That said, looking ahead, the pound could find its feet against the euro. This is because, first, Eurozone inflation fell -0.1% in February, to 1.2%. This is further away from the European Central Bank's 2.0% target, cutting the odds that the ECB will hike interest rates soon! On the other hand though, the UK and the EU may struggle to agree a Brexit transition deal, before the end of March.

Pound to Swiss franc

The pound to Swiss franc interbank exchange rate sinks! Sterling declined -1 cent against the Swissie last week, to 1.29.

The Swiss franc stood taller last week, chiefly because US President Donald Trump announced a 25% tariff in steel imports, and 10% on aluminium, into the USA. In turn, Mr. Trump's tariffs have sparked fears of a global trade war, in which lots of countries impose protectionist measures on each other. This has lifted the franc, as a safe haven currency in times of economic uncertainty!

Outlook

What's more, the Swiss franc could rise further, looking ahead, as Switzerland's economy has unexpectedly sped up. To start with, KOF's Swiss leading indicator jumped to 108.0 in February, above forecasts for 106.1. Also, SVME's Swiss economic indicator reached 65.5 this month, above predictions for 64.0. 'The Swiss economy should continue to grow at rates above average,' says KOF!

Pound to US dollar

Sterling slides versus the greenback! The pound to US dollar interbank exchange fell -2.26 cents last week, to 1.3775.

The US dollar flew higher last week, because new Federal Reserve chairman Jerome Powell was upbeat about America's economy. Speaking to Congress, Mr. Powell said that 'some of the headwinds the US economy faced in previous years have turned into tailwinds.' This sparked speculation that the Fed could hike US interest rates up to 4 times this year, to 2.5%, lifting the buck!

Pound to Australian dollar

The pound to Australian dollar interbank exchange rate tanks! Sterling dived -0.5 cents against the Aussie last week, to 1.78.

The Australian dollar puffed out its chest last week, first because manufacturing output in China, Australia's biggest trade partner, hit a 6-month high in February, according to Caixin. In particular, Caixin's China manufacturing PMI hit 51.6 this month, +0.3 above forecasts. Furthermore, the Aussie has also climbed, as it's thought that Australia's economy grew by a solid +0.7% in Q1 2018.

Outlook

That said, looking forward, the Australian dollar could cough and splutter versus sterling. This is because Australia exports vast quantities of steel to the USA, and so is especially vulnerable to President Trump's proposed 25% steel tariffs. If Mr. Trump imposes his tariffs, Australian steel will become much more expensive in America, thus hurting steel refining companies Down Under!

Pound to New Zealand dollar

Sterling sinks like a lead balloon against the kiwi! The pound to New Zealand dollar interbank exchange slumped -0.75 cents last week, to 1.91.

The New Zealand dollar stood up higher last week, first because New Zealand's terms of trade rose +0.8% in Q4, to hit their highest since mid-1973. In particular, NZ terms of trade flourished, as kiwi export prices rose by +4.9%, while lamb prices exploded by +12% to an all-time high. Also, the NZ dollar charged forward, as New Zealand consumer confidence rose to 127.7 in February!

Pound to Canadian dollar

The pound to Canadian dollar interbank exchange rate zooms upward! Sterling rose by +1 cent against the loonie last week, to 1.7775.

The Canadian dollar battened down the hatches last week, chiefly because Canada is very vulnerable to President Trump's proposed steel tariffs, as the world's biggest exporter of steel to America, What's more, markets reckon that President Trump may announce tariffs on other goods and services later this year. This may hurt Canada, as 75% of CA exports go south to the USA!

Outlook

Moreover, looking forward, the Canadian dollar could slide further. This is because, first, Canada's manufacturing output reached just 55.6 in February, -0.2 below forecasts. In particular, loonie factories reported fewer new orders this month. In addition, Canada's GDP rose by just +1.7% in Q4 year-on-year, -0.3% below forecasts. This bodes ill for Canada's economic growth in 2018 too!

Pound to Japanese yen

Sterling dives dives dives versus the yen! The pound to Japanese yen interbank exchange rate slithered -2.64% last week, to 145.26, its lowest since mid-September last year.

The yen entered poll position last week, first because US President Trump announced his steel and aluminium tariffs. This lifted the yen, as a global safe haven in times of turbulence. In addition, the yen also stood taller, as Bank of Japan governor Haruhiko Kuroda hinted at ending his vast monetary stimulus for the 1st time. Mr. Kuroda said that the BoJ may end QE in the fiscal year 2019.

Outlook

Moreover, looking forward, the yen could continue to soar. This is because Japan's unemployment rate surprisingly fell -0.3% in January, to an astonishing 2.4%, the lowest since April 1993. In addition, Japan's ratio of open jobs to applicants held at 1.59 in January, the highest since 1974. This tells us that Japan's job market is blisteringly hot, which could further boost Japan's economy!

Pound to South African rand

The pound to rand interbank exchange rate claws back ground! Sterling marched higher +2.23% against the South African rand last week, to 16.52.

The rand tucked its tail between its legs last week, first because South Africa's trade deficit ballooned to -R27.7 billion in January, beneath forecasts for -R5.0 billion. Also, South Africa's private sector credit grew by just +5.54% last month, below hopes for +6.6%. These disappointing figures tell us that new president Cyril Ramaphosa has lots of work ahead, to restore South Africa's prosperity!

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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.

References

1. Anonymous, 'Canada's economic growth rate at 1.7 per cent in fourth quarter', March 2nd 2018, CTVNews.ca, https://www.ctvnews.ca/business/canada-s-economic-growth-rate-at-1-7-per-cent-in-fourth-quarter-1.3825666
2. Anonymous, 'NZ terms of trade at new record high', March 1st 2018, RadioNZ.co.nz, https://www.radionz.co.nz/news/business/351592/nz-terms-of-trade-at-new-record-high
3. Anonymous, 'Swiss KOF Leading Indicator Unexpectedly Climbs In February', February 28th 2018, Markets.BusinessInsider.com,
http://markets.businessinsider.com/news/interestrates/swiss-kof-leading-indicator-unexpectedly-climbs-in-february-1017410326
4. David Hodges, 'TSX, U.S. stocks fall after Trump announces plans for steel tariffs; Canadian dollar down', March 1st 2018, TheStar.com, https://www.thestar.com/business/2018/03/01/tsx-down-in-broad-based-decline-canadian-dollar-loses-ground.html
5. Howard Schneider, Jason Lange, 'Fed's Powell nods to stronger economy, backs gradual rate hike path', February 27th 2018, Reuters.com, https://www.reuters.com/article/us-usa-fed-powell/feds-powell-nods-to-stronger-economy-backs-gradual-rate-hike-path-idUSKCN1GB1QU
6. Katia Dmitrieva, 'Manufacturing in U.S. Expands at Fastest Pace Since May 2004', March 1st 2018, Bloomberg.com, https://www.bloomberg.com/news/articles/2018-03-01/manufacturing-in-u-s-expands-at-fastest-pace-since-may-2004
7. Leah Schnurr, 'Canada manufacturing growth dips in February; employment at 6mth high', March 1st 2018, NASDAQ.com, https://www.nasdaq.com/article/canada-manufacturing-growth-dips-in-february-employment-at-6mth-high-20180301-01033
8. Sandeep Kanihama, 'Australia: Economy looks to have performed solidly in Q4 - NAB', March 2nd 2018, FXStreet.com, https://www.fxstreet.com/news/australia-economy-looks-to-have-performed-solidly-in-q4-nab-201803020504
9. Sharon Zollner, 'ANZ Consumer Confidence: Walking on sunshine', March 2nd 2018, Voxy.co.nz, http://www.voxy.co.nz/business/5/304972

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