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Pound Rockets Versus US Dollar, as Global Economic Outlook Upbeat

Image credit: Susan Kers

by Peter Lavelle

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

This tells you what’s happened to the interbank exchange rates in the last week, plus what may happen next, for your money transfer!

Pound to euro

Sterling stands its ground versus the common currency! The pound to euro interbank exchange rate ended last week where it started, around 1.1275.

The pound stuck to its guns last week, first because UK inflation held steady at 3.0% in January, above forecasts for a decline to 2.9%. This lifts the odds that the Bank of England will further hike UK interest rates this year, above their current 0.5%. On the other hand though, UK retail sales expanded by just +0.1% in January, below hopes for +0.5%, thus weighing on the pound also!

Meanwhile, the euro stood firm last week, first because, on the bright side, it was confirmed that Eurozone GDP expanded by +2.5% in 2017, the most in a decade. This tells us that the common currency has overcome its debt crisis. That said though, the European Central Bank looks set to keep interest rates at 0.0% until 2020, says a new Reuters poll, so dragging down the euro too!

Outlook

What's more, looking forward, the pound could fly higher against the euro. This is because it was reported last week that the EU intends to water down a 'punishment clause' for the UK's Brexit transition phase. This tells us that the EU has eased its stance towards the UK, lifting the odds that they'll agree a Brexit deal. In turn, this boosts the UK's GDP outlook, and may help sterling too!

Pound to Swiss franc

Sterling plays dead lions versus the Swiss franc! The pound to franc interbank exchange rate stuck close to 1.2975 last week.

The franc was steady last week, first because, on the positive side, investors bought the franc, as a safe haven from the global stock market fall. This is because Switzerland enjoys a rock-steady economy, and so is a harbour in stormy market seas. Yet on the other hand, the Swiss National Bank looks set to keep interest rates at all-time lows of -0.75% for longer, so capping the franc!

Pound to US dollar

Sterling rockets versus the greenback! The pound to US dollar interbank exchange rate climbed +2 cents last week, to 1.4025.

The US dollar sank last week, even though America's inflation remained at 2.1% in January, above forecasts for 1.9%. Ordinarily, we would expect high inflation to lift the US dollar, as high inflation signals that the Federal Reserve may lift interest rates faster. This time though, the US dollar lost out even with high inflation, as investors feel upbeat about the global economic outlook.

Outlook

Furthermore, the greenback could continue to slide, looking forward. This is because, first, US retail sales surprisingly fell -0.3% in January, below hopes for +0.2%. This bodes ill for America's GDP growth outlook, given that consumer spending makes up 66% of the US economy. Also, President Trump's vast -$1.5 trillion tax cut may fuel America's fiscal deficit, weighing on the buck too.

Pound to Australian dollar

The pound to Australian dollar interbank exchange rate stays put! Sterling stuck close to 1.77 against the Aussie last week.

The Australian dollar was stuck in the mud last week, first because, to start positively, Australia's unemployment rate fell -0.1% in January, to 5.5%. Yet on the other hand, this fall in joblessness was largely because Australia's labour force participation rate fell -0.1% last week, to 65.6%. Also, Australia shed -49,800 full-time jobs in January too, thus putting a brake on the Aussie dollar!

Outlook

What's more, looking forward, the Australian dollar may stay where it is. This is because Reserve Bank of Australia governor Philip Lowe has suggested that Australia's interest rates will rise, though some time from now. Speaking last week, the RBA chief said that 'It is more likely that the next move in interest rates will be up, rather than down', though this could take some time!

Pound to New Zealand dollar

Sterling loses out versus the kiwi! The pound to New Zealand dollar interbank exchange rate sank -1 cent last week, to 1.8975.

The New Zealand dollar stood taller last week, chiefly because New Zealand inflation looks set to rise, says a respected poll. According to the Reserve Bank of New Zealand's quarterly inflation expectations survey, kiwi price pressures will reach 2.11% 2 years from now, above the RBNZ's target. This lifts the odds that the RBNZ will hike interest rates, thereby boosting the NZ dollar!

Pound to Canadian dollar

The pound to Canadian dollar interbank exchange rate shoots up! Sterling climbed +1.75 cents against the loonie last week, to 1.7575.

The Canadian dollar slipped on a banana skin last week, chiefly because Canada unexpectedly shed -88,000 jobs in January, well above forecasts for +10,000 roles. This was the sharpest fall in Canadian unemployment since the financial crash, and pushed up the CA joblessness rate by +0.1%, to 5.9%. In particular, firms sacked part-time workers last month, thus weighing on the loonie!

Pound to Japanese yen

Sterling edges downward against the yen! The pound to Japanese yen interbank exchange rate fell -0.75% last week, to 149.16.

The yen triumphed last week, first because Japan's GDP grew by +0.5% in Q4 2017. Japan's economy has now expanded for 12 consecutive quarters, the longest stretch since the 1980s. This points to the success of prime minister Shinzo Abe's 'Abenomics' program, to overcome Japan's long-term sluggishness. What's more, Japan's industrial production jumped by +2.9% in December too!

Outlook

That said, looking forward, the yen could tread water. This is because, first, Bank of Japan governor Haruhiko Kuroda has been appointed for a 2nd term. This suggests that Mr. Kuroda will keep Japan's interest rates at all-time lows of -0.1%, to weaken the yen. Yet equally, Japan's finance minister Tarō Asō recently said that there's no need to intervene on forex markets, to prevent the yen from rising!

Pound to South African rand

The pound to South African rand interbank exchange rate slides! Sterling dropped -1.68% against the rand last week, to 16.33.

The rand lost out last week, chiefly because South Africa's president Jacob Zuma resigned, over ongoing corruption charges. This opens the way for new African National Congress (ANC) chief Cyril Ramaphosa to take over as South Africa's president. It's hoped that Mr. Ramaphosa will revive South Africa's economic fortunes, while restoring confidence in the country's political institutions too!

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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. Jacob Greber, 'RBA's Philip Lowe says inflation is becoming more prominent', February 16th 2018, AFR.com, http://www.afr.com/news/economy/monetary-policy/rbas-philip-lowe-says-inflation-is-becoming-more-prominent-20180215-h0w6l1
2. Jonathan Cable, 'May Bank of England interest rate hike now in play - Reuters poll', February 14th 2018, Reuters.com, https://uk.reuters.com/article/uk-britain-economy-poll/may-bank-of-england-interest-rate-hike-now-in-play-reuters-poll-idUKKCN1FY07G
3. Matt Wade, 'RBA more relaxed on housing, next rate move some way off', February 16th 2018, SMH.com.au, http://www.smh.com.au/business/the-economy/rba-reiterates-does-not-see-case-for-near-term-rate-rise-20180215-p4z0jo.html
4. Shrutee Sarkar, 'Reuters poll: ECB rate rise? You have a very long wait, say economists', February 16th 2018, Reuters.com, https://www.reuters.com/article/us-eurozone-economy-poll/reuters-poll-ecb-rate-rise-you-have-a-very-long-wait-say-economists-idUSKCN1G001E
5. Stanley White, 'Japan posts longest growth streak since 1980s bubble economy', February 14th 2018, Reuters.com, https://www.reuters.com/article/us-japan-economy-gdp/japan-posts-longest-growth-streak-since-1980s-bubble-economy-idUSKCN1FX33C
6. Tetsushi Kajimoto, 'Japan policymakers step up warnings over 'one-sided' yen gains', February 16th 2018, Reuters.com, https://www.reuters.com/article/uk-japan-economy-aso/japan-policymakers-step-up-warnings-over-one-sided-yen-gains-idUSKCN1G00TW
7. Theophilos Argitis, 'Canada just lost the most jobs in nine years, with biggest drop on record in part-time work', February 9th 2018, Business.FinancialPost.com, http://business.financialpost.com/news/economy/update-1-canada-sheds-88000-jobs-in-jan-biggest-decline-since-2009
8. Tommy Wilkes, Ritvik Carvalho, 'Swiss franc predicted to fall despite recent rally', February 9th 2018, Reuters.com, https://www.reuters.com/article/uk-global-markets-swiss/swiss-franc-predicted-to-fall-despite-recent-rally-idUSKBN1FT0UA

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