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Pound Rises Versus Euro, as BoE May Hike UK Interest Rates Sooner

by Peter Lavelle

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

This tells you what’s affected the interbank exchange rates in the past week, and what may happen, looking ahead!

Pound to euro

Sterling takes a running jump versus the euro! The pound to euro interbank exchange rate leapt +0.75 cents last week, to 1.1375.

The pound strengthened last week, chiefly because the Bank of England hinted that UK interest rates may soon faster and further than financial markets currently expect. In particular, UK interest rates could rise, as wages in the UK are starting to firm, and to fight inflation. To be specific, the Old Lady of Threadneedle Street reckons that borrowing costs will rise 3 times in the next 3 years.

Meanwhile, the euro lost out last week, first because Eurozone inflation sank by -0.1% in January, to 1.3%. This puts inflation in the currency bloc further below the European Central Bank's target of close-to-but-below 2.0%. In turn, this eases pressure on the ECB to lift interest rates. What's more, the euro also slid last week, as business activity in the Eurozone decelerated in February.

Outlook

That said though, sterling may find it tough to rise further, looking ahead. This is because, first, UK GDP for Q4 2017 has been downgraded by -0.1%, to 0.4%. On the other hand though, the euro may struggle too, as Germany's Social Democratic Party (SDP) will next week vote on forming an alliance with chancellor Angela Merkel. According to financial markets, the SDP vote will be a close call.

Pound to Swiss franc

The pound to Swiss franc interbank exchange rate jumps! Sterling rose +0.75 cents against the franc last week, to 1.31.

The Swiss franc sank last week, chiefly because Switzerland's trade surplus narrowed. To be specific, Switzerland's trade surplus fell to +Fr1,324m in January, well below forecasts for +Fr1,324m. This was Switzerland's narrowest trade surplus since January 2012, or 6 years, and because Switzerland's exports fell -5.1% last month, while imports rose by +3.8%. Hence the fainting franc!

Pound to US dollar

Sterling powers ahead versus the greenback! The pound to US dollar interbank exchange rate rose +0.5 cents last week, to 1.4050.

The US dollar shrank last week, chiefly because financial markets feel cautious, ahead of new Federal Reserve chairman Jeremy Powell's first testimony to Congress. In Mr. Powell's testimony, Mr. Powell may hint at how many times the Fed will lift US interest rates this year. In turn, if Mr. Powell is more downbeat than financial markets expect, this would bode ill for the US economy, plus the buck!

Outlook

That said, the US dollar could triumph, looking ahead. This is because business activity in America expanded at the fastest pace in 27 months in February, according to IHS Markit. In particular, the US composite PMI, measuring output in the USA's services, manufacturing and construction sectors, hit 55.9 this month. This is well above the 50.0 figure that signals growth, plus financial market forecasts for 55.4.

Pound to Australian dollar

The pound to Australian dollar interbank exchange flies high! Sterling rose +1 cent against the Aussie last week, to 1.78.

The Australian dollar tucked its tail between its legs last week, largely because the Reserve Bank of Australia looks set to keep interest rates at 1.5% for the foreseeable future. At a time when the US Federal Reserve, Bank of England, and Bank of Canada are talking about lifting interest rates, this eats into Australia's interest rate advantage, making Australia less attractive for investors!

Pound to New Zealand dollar

Sterling goes to infinity and beyond versus the kiwi dollar! The pound to New Zealand dollar interbank exchange rose +1.5 cents last week, to 1.9125.

The New Zealand dollar coughed and spluttered last week, chiefly because the Reserve Bank of New Zealand looks set to keep interest rates on hold at 1.75% for all of 2018. At a time when other central banks are lifting interest rates, this makes putting money in kiwi assets less attractive. In fact, according to financial markets, the RBNZ will keep borrowing costs on hold until May 2019!

Pound to Canadian dollar

The pound to Canadian dollar interbank exchange rate rockets! Sterling shot up +1.25 cents versus the loonie dollar last week, to 1.7725.

The Canadian dollar crashed last week, chiefly because Canada's retail sales sank -0.8% in December, well below forecasts for a +0.2% rise, and the sharpest decline since March 2016. In particular, Canada's retail sales fell at the tail end of last year, as sales in electronics shops sank -9.1%, and sales in general merchandise stores fell by -5.3%. So this weakened the loonie dollar!

Outlook

Furthermore, looking ahead, the Canadian dollar could continue to sink. This is because, what with Canada's retail sales well below forecasts in December, it's thought that Canada's GDP rose by just +2.0% in Q4, below hopes for +2.5%. In turn, this bodes ill for Canada's economic growth for 2018 too, and lifts the odds that the Bank of Canada will keep interest rates stable, at just 1.25%!

Pound to Japanese yen

Sterling stays steady versus the yen! The pound to Japanese interbank exchange ended last week where it began, at 149.26.

The Japanese yen held its ground last week, even though Japan's inflation held steady in January, at +0.9%. This remains well below the Bank of Japan's target of 2.0%, and so cuts the odds that Japan's central bank will lift interest rates in the near future, above their current all-time low of -0.1%. In spite of low inflation though, the Japanese yen held steady over the course of last week!

Outlook

That said though, the yen could weaken, looking forward. This is because, first, more than half of Japanese companies intend to keep wages steady in 2018, according to a recent Reuters poll. This will weigh both in Japan's GDP growth, plus inflation. In addition, Japan's consumer spending has stayed flat in the past 6 months too, which could also put a brake on Japan's economy this year!

Pound to South African rand

Sterling trips and falls versus the rand! The pound to South African rand interbank exchange rate fell -0.97% last week, to 16.18.

The rand strutted its stuff last week, chiefly because, following Jacob Zuma's resignation, Cyril Ramaphosa was appointed South Africa's new president. It's hoped that Mr. Ramaphosa will make a more effective manager of South Africa's economy than his predecessor, while stamping out corruption, and restoring trust in South Africa's institutions, both among voters and foreign investors!

Outlook

That said though, looking forward, the rand may go wobbly at the knees. This is because, in South Africa's 1st budget with Mr. Ramaphosa as president, South Africa has lifted VAT by +1%, to 15%. This could weaken the rand, because this is the 1st hike in South Africa's sales tax since the end of apartheid in the early 1990s, and looks set to hurt South Africa's poorer and black citizens.

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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, 'Japan’s inflation rate steady at 0.9% in January due to energy costs', February 23rd 2018, JapanTimes.co.jp, https://www.japantimes.co.jp/news/2018/02/23/business/economy-business/japans-inflation-rate-steady-0-9-january-due-energy-costs/#.WpAxBajwbIU
2. Anonymous, 'South Africa hikes sales tax in ‘tough’ post-Zuma budget', February 22nd 2018, TheNews.com.pk, https://www.thenews.com.pk/print/283969-south-africa-hikes-sales-tax-in-tough-post-zuma-budget
3. Anonymous, 'Swiss Trade Surplus At 6-Year Low', February 20th 2018, Markets.BusinessInsider.com, http://markets.businessinsider.com/news/interestrates/swiss-trade-surplus-at-6-year-low-1016410784
4. Colleen Goko, 'Rand's 'Ramaphosa rally' in doubt amid mixed signs', February 21st 2018, TimesLove.co.za, https://www.timeslive.co.za/sunday-times/business/2018-02-21-rands-ramaphosa-rally-in-doubt-amid-mixed-signs/
5. Leika Kihara, 'Japan's stagnant inflation set to keep BOJ exit from stimulus distant', February 23rd 2018, Reuters.com, https://www.reuters.com/article/us-japan-economy-cpi/japans-stagnant-inflation-set-to-keep-boj-exit-from-stimulus-distant-idUSKCN1G6307
6. Rebecca Howard, 'NZ dollar heads for 1.2% weekly fall', February 23rd 2018, Scoop.co.nz, http://www.scoop.co.nz/stories/BU1802/S00648/nz-dollar-heads-for-12-weekly-fall.htm
7. Tim Wallace, 'Bank of England bosses hint at higher interest rates to cut inflation', February 21st 2018, Telegraph.co.uk, http://www.telegraph.co.uk/business/2018/02/21/bank-england-bosses-hint-higher-interest-rates-cut-inflation/

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