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Pound Rockets, As Bank of England Hints At Interest Rate Rise Soon

Image credit: Nimalan Tharmalingam

by Peter Lavelle

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

Pound to euro

Sterling surges versus the common currency! The pound to euro interbank exchange rate rocketed +3.5 cents last week, as high as 1.1393, its highest since July 14th.

The pound got its skates on last week, chiefly because the Bank of England hinted that it may hike UK interest rates above their current all-time low of 0.25% in the near future. In particular, BoE executive Gertjan Vlieghe said that UK borrowing costs may rise 'as early as in the coming months' and more than once. If the BoE hikes, this would be the first interest rate rise since July 2007!

Meanwhile, the euro sank like a stone last week, because European leaders poured cold water on EU Commission President Jean-Claude Juncker's vision of a federalist Europe. For instance, Dutch prime minister Mark Rutte called Mr. Juncker a 'fantasist', while Austria’s Chancellor Christian Kern added that 'it simply makes no sense to enlarge the Eurozone', as Mr. Juncker speech outlined.

Outlook

That said, looking forward, sterling may slam on the brakes versus the euro. This is because many economists think that the Bank of England is 'crying wolf' with the financial markets. This is to say, the BoE may be suggesting that it will soon lift interest rates, when it has little intention of doing so, to lift up demand for the pound, which in turn will cut UK inflation below its current 2.9%.

Pound to Swiss franc

The pound to Swiss franc interbank exchange shoots for the moon! Sterling rose +4.5 cents last week, up to 1.3077, its strongest since the day after the Brexit vote last year.

The Swiss franc was on the ropes last week, chiefly because the Swiss National Bank held interest rates at -0.75%, the lowest rate among developed-country central banks. Moreover, the SNB added that there's still a 'significant overvaluation' in the franc, and that the SNB retains a 'willingness to intervene in the foreign-exchange market', should the franc start to strengthen again.

Pound to US dollar

Sterling hops, skips and jumps versus the greenback! The pound to US dollar interbank exchange rate jumped +4 cents last week, as high as 1.3617, its strongest since June 24th last year.

The US dollar raised up the white flag last week, first because retail sales in America fell -0.2% in August, below forecasts for +0.1%. This suggests that US GDP growth may slow in Q3, given that retail sales make up the biggest chunk of America's economy. Moreover, the buck also withered on the vine, as US inflation rose to +1.9% last month, yet this may just be due to Hurricane Harvey.

Outlook

Moreover, the greenback could continue to flatline, looking forward. This is because, first, 'the disappointment of Trump’s failure to achieve tax reform or fiscal stimulus' continues, according to Hantec Markets analyst Richard Perry. Moreover, the odds that the Federal Reserve will hike interest rates again this year, above their current 1.00-1.25%, continue to slide, reckon financial markets.

Pound to Australian dollar

The pound to Australian dollar interbank exchange rate goes for broke! Sterling sprinted +6 cents against the Aussie last week, up to 1.6987, its strongest since July 6th.

The Australian dollar came to a screeching halt last week, because Reserve Bank of Australia executive Ian Harper pulled out the stops to end rumours that the RBA will hike interest rates, above their current 1.5%. In particular, Mr. Harper said in a speech that 'Why would anyone be suggesting tightening monetary policy when the economy is operating below potential? I mean hello?'

Outlook

Moreover, the Aussie dollar may continue to trip over its shoelaces in future. This is because, even though Australia created a mighty +54,200 new jobs in August, the RBA's Ian Harper said that under-employment and low wage growth remain a 'concern'. What's more, while discussing whether the Reserve Bank could intervene to influence the Aussie's value, Mr. Harper said 'Give me a break.'

Pound to New Zealand dollar

The pound to New Zealand dollar interbank exchange rate has lift off! Sterling zoomed ahead +6 cents last week, up to 1.8740, its strongest since May 19th.

The kiwi dollar dived last week, chiefly because New Zealand's Labour Party looks set to win the forthcoming general election this month. This is weighing down the kiwi dollar, because NZ Labour has promised to lift taxes, which may slow New Zealand's GDP. What's more, NZ Labour also wants to reform the Reserve Bank of New Zealand too, which may lead to lower interest rates.

Outlook

Moreover, the New Zealand dollar could crash and burn further, looking ahead. This is because, even though kiwi GDP is forecast to have risen by +0.8% in Q3, GDP per capita may have shrunk for the 3rd consecutive quarter. This means that, while New Zealand's economy is getting bigger, New Zealanders aren't getting richer, pointing to low productivity growth in the land of The Hobbit.

Pound to Canadian dollar

Sterling knows no limits versus the loonie! The pound to Canadian dollar interbank exchange rate jumped +6 cents last week, up to 1.6558, its highest in 6 weeks.

The Canadian dollar ran out of puff last week, chiefly because financial markets started to play down the CA dollar's recent strength. For example, Craig Fehr at equities firm Edward Jones said that the CA dollar is on a 'sugar rush', due to the Bank of Canada's surprise decision to lift interest rates. The loonie is “probably due to come back a little bit in the short term,' added Mr. Fehr.

Outlook

Furthermore, the CA dollar could continue to weaken in future. This is because, according to financial markets, the Bank of Canada's interest rate hike can only fuel the loonie for so long. For instance, according to Dagmara Fijalkowski at RBC Global Asset Management, buying the loonie because of the BoC's past interest rate hikes is 'like driving a car looking only in the rearview mirror'.

Pound to South African rand

The pound to South African rand interbank exchange rate has lift-off! Sterling jumped +4.74% last week, to 17.89, its highest since November 17th last year.

The rand's motor coughed and spluttered last week, mostly because, even though South Africa left recession in Q2, GDP growth forecasts for 2017 remain below 1.0%. For instance, the SA economy has been 'hurt by a systematic deterioration in both consumer and business confidence', says Stanlib chief economist Kevin Lings, while there's been no 'broad-based revival' outside of agriculture.

Pound to Japanese yen

Sterling takes the elevator to the penthouse versus the yen! The pound to Japanese yen interbank exchange rate rose +5.21% last week, to 150.63, its highest since June 6th 2016.

The yen sank beneath the waves last week, chiefly because Japan's manufacturing sector slowed. To start with, industrial production in the Land of the Rising Sun fell -0.8% in July. What's more, confidence among Japanese factory bosses fell for the 1st time in 4 months in September, according to a Reuters Tankan survey. Given that Japan is an export-based economy, this bodes ill!

Outlook

In addition, the yen could continue to stumble, looking forward. This is because financial markets have stayed calm, even though North Korea launched another ballistic missile over Japan last week. This suggests that economists think that the North Korean crisis won't escalate further. Given this, the yen may stay on the back foot, as investors look past Japan's safe haven currency!

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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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