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Pound Loses Out Versus Euro, as ECB To Further Ease Back Stimulus

Image credit: Matteo Pescarin

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 rates in the last week, and what may happen next, for your money transfer!

Pound to euro

Sterling slides versus the common currency! The pound to euro interbank exchange rate dived around -0.25 cents last week, to close to 1.1250.

The pound lost out last week, first because prime minister Theresa May botched her Cabinet reshuffle. In particular, Mrs. May intended to reassert her political authority, yet education secretary Justine Greening resigned, and health secretary Jeremy Hunt beefed up his role. This bodes ill for the UK government's stability, ahead of talks about the Brexit transition and UK/EU trade deal.

Meanwhile, the euro reached for the stars last week, chiefly because the European Central Bank (ECB) hinted that it will soon further ease back its vast stimulus. To be specific, in the minutes of the central bank's latest meeting, the ECB said that 'the language pertaining to the monetary policy stance could be revisited early in 2018.' This could eventually lead the ECB to hike interest rates!

Outlook

What's more, looking ahead, the common currency could further flex its muscles against sterling. This is because, German Chancellor Angela Merkel has agreed to start formal coalition talks with the Socialists' Martin Schulz, to form a government. This may put an end to Germany's government deadlock, following September's fragmented September elections, thus further lifting the euro!

Pound to Swiss franc

Sterling comes out swinging versus the Swissie! The pound to Swiss franc interbank exchange rose close to +0.5 cents last week, to around 1.3275.

The Swiss franc ran out of puff last week, chiefly because global money managers turned away from Switzerland, given the Eurozone's recovery. In particular, the European Central Bank's hints that it will further ease back its quantitative easing has made the euro attractive compared to the franc. Moreover, the strong Eurozone economy has cut demand for the franc as a safe haven too.

Pound to US dollar

The pound to US dollar interbank exchange rate shoots up! Sterling climbed +2 cents last week, to 1.3750, its highest since late June 2016.

The US dollar weakened last week, chiefly because financial markets remain uncertain whether the Federal Reserve will lift interest rates 3 times this year, above their current 1.25%-1.5%, as hoped for. In particular, US producer prices, which feed into America's inflation, fell -0.1% in December, the 1st decline since August 2016. This puts less pressure on the Fed to repeatedly hike in 2018!

Pound to Australian dollar

Sterling jumps versus the Aussie! The pound to Australian dollar interbank exchange rate climbed around +0.75 cents last week, to close to 1.73.

The Australian dollar dived like a submarine last week, first because economists are concerned about Australians' wage growth outlook for this year. In particular, Australians' household income jumped just +1.8% in September year-on-year, the least since 1991, while Aussie wages are forecast to rise just +0.1% in 2018. This will weigh on Australia's GDP growth, and the AU dollar also!

Outlook

On the other hand though, the Australian dollar could bounce back, as Australia's economy continues to outperform. To start with, Australian retail sales jumped +1.2% in November, well above predictions for +0.4%, buoyed by sales of the iPhone X. In addition, Australia's construction industry rocketed ahead of forecasts in November, as building permits exploded by a huge +11.7%.

Pound to New Zealand dollar

The pound to New Zealand dollar interbank exchange rate sinks! Sterling fell close to -0.25 cents against the kiwi last week, to around 1.89.

The NZ dollar triumphed last week, chiefly because markets decided that they'd over-reacted to Labour's recent election win. In particular, markets were concerned that Labour would restrict foreign sales of kiwi property, and reform the RBNZ to target low unemployment. Now though, even with these policies, New Zealand's GDP growth looks set to continue, thus lifting the kiwi dollar.

Pound to Canadian dollar

Sterling has lift-off versus the CA dollar! The pound to Canadian dollar interbank exchange rate flew +2.75 cents last week, up to 1.71.

The Canadian dollar ran out of petrol by the roadside last week, because Canadian government sources reported that they think US President Trump will pull out of the NAFTA free trade deal. This has weakened the loonie dollar, because the USA is Canada's biggest trade partner. Hence, if America abandons NAFTA, this could limit Canada's exports to the USA, weighing on GDP growth.

Outlook

Moreover, looking forward, the Canadian dollar could weaken further. This is because, first, Canada's building permits unexpectedly tumbled -7.7% in November, far exceeding predictions for a -0.3% drop. In addition, the loonie dollar may also decline, as Canada's finance minister Bill Morneau received an internal memo, saying that Canada's GDP is forecast to 'wane' in coming years.

Pound to South African rand

The pound to South African rand interbank exchange rate zooms up! Sterling gained +1.79% against the rand last week, to 17.01, its highest since December 22nd.

The South African rand tumbled last week, as financial markets are doubtful of new African National Congress leader Cyril Ramaphosa's ability to reform South Africa's economy. In particular, even if Mr. Ramaphosa replaces Jacob Zuma as South Africa's next president, it's thought that many of Mr. Zuma's allies will continue to occupy top posts within South Africa's government.

Pound to Japanese yen

Sterling inches downward versus the yen! The pound to Japanese yen interbank exchange declined -0.75% last week, to 152.28.

The yen stood taller last week, chiefly because the Bank of Japan began a 'stealth tapering' of its vast monetary stimulus. In particular, the BoJ will now buy -¥10bn less of 10 to 25-year government bonds, at just ¥190bn. This has lifted the yen, because this tells us that the Bank of Japan will inject smaller sums into Japan's financial system, and opens the door to eventually lifting interest rates!

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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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