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Pound Strengthens Versus Euro and US Dollar, as UK Q4 GDP Upgraded

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 rates in the past week, and what may happen next, for your money transfers!

Pound to euro

Sterling stands taller versus the common currency! The pound to euro interbank exchange rate jumped +0.25 cents last week, to 1.1375.

The pound strutted its stuff last week, first because UK GDP rose by +0.5% in Q4 last year, above the previous estimate of +0.4%. In particular, the UK's services and manufacturing industries accelerated the UK economy between October and December. Also, sterling also triumphed last week, as UK employment rose by a bumper +102,000 jobs in the 3 months to November too.

Outlook

That said, looking ahead, sterling may lose out versus the euro. This is because, last Thursday, European Central Bank president Mario Draghi suggested that Eurozone inflation may soon rise. Speaking in Frankfurt, Mr. Draghi said that 'solid' growth has 'strengthened further our confidence that inflation will converge to close to but below 2%'. So this lifted the common currency!

Pound to Swiss franc

The pound to Swiss franc interbank exchange rate falls back a notch! Sterling sank -1.25 cents against the Swissie last week, to 1.3225.

The Swiss franc flew higher last week, even though Swiss National Bank chief Thomas Jordan further talked down the franc. Speaking to Swiss state broadcaster SRF, Mr. Jordan said that 'the franc remains highly valued, while 'Swiss inflation is still very low, significantly under 2%, actually even under 1%.' So Mr. Jordan's comments may weaken the Swiss franc in future!

Pound to US dollar

Sterling rockets versus the greenback! The pound to US dollar interbank exchange rate jumped +2 cents last week, to 1.4125.

The US dollar bit the dust last week, first because US Treasury Secretary Steven Mnuchin broke with decades of 'strong dollar' policy, to say that a weak US dollar is good for US trade. Furthermore, Mr. Mnuchin added that he's 'not concerned' by the buck's weakness. In addition, the US dollar also tumbled last week, as US GDP rose by +2.6% in Q4 YoY, -0.4% below forecasts.

Outlook

What's more, looking forward, the US dollar could continue to sink into the swamp. This is because, even though the US Federal Reserve looks set to lift interest rates 3 times this year, above their current 1.25%-1.5%, other central banks look set to hike, and that's got the market's attention. In particular, the Bank of England, ECB and also Bank of Canada are moving towards higher rates.

Pound to Australian dollar

The pound to Australian dollar interbank exchange rate marches higher! Sterling roared ahead +1.25 cents against the Aussie last week, up to 1.7475.

The AU dollar coughed and spluttered last week, chiefly because the Reserve Bank of Australia (RBA) looks set to keep interest rates at 1.5% all this year. The RBA could keep rates on hold, to keep a lid on Australia's high housing prices, as well as prevent indebted Australians from borrowing more. So, given that other central banks are preparing to hike, this is weighing on the Aussie!

Pound to New Zealand dollar

Sterling goes to infinity and beyond versus the kiwi! The pound to New Zealand dollar interbank exchange rate jumped +2.25 cents last week, up to 1.9275.

The kiwi dollar ran out of puff last week, largely because New Zealand inflation reached just +1.6% in Q4, below market forecasts, as well as the mid-point of the Reserve Bank of New Zealand's (RBNZ) 1.0%-3.0% range. In particular, NZ price pressures weakened, as imported products cost less. In turn, this cuts the odds that the RBNZ will hike interest rates, above their current 1.75%!

Pound to Canadian dollar

Sterling races ahead versus the loonie! The pound to Canadian dollar interbank exchange rate jumped by +1.25 cents last week to 1.7450.

The Canadian dollar sank like a submarine last week, chiefly because Bank of Canada governor Stephen Poloz told Davos that Canada's highly-indebted households are more vulnerable to higher interest rates than in the past. This cuts the chances that the BoC will repeatedly hike borrowing costs above their current 1.25%, to prevent Canada's households from defaulting on their loans.

Outlook

Furthermore, the Canadian dollar could continue to sink, looking ahead. This is because Canada's core inflation reached just 1.2% in December, said Statistics Canada last week, below financial market forecasts for +1.5%. This tells us that Canada's domestic economy is struggling to generate higher price pressures, and also reduces the odds that the BoC will hike above 1.25% soon.

Pound to Japanese yen

The pound to Japanese yen interbank exchange rate hops, skips and jumps higher! Sterling climbed +0.1% against the yen last week, to 154.02.

The Japanese yen dived like a lemming last week, first because the Bank of Japan held interest rates at a record low of -0.1%, as forecast. What's more, Japan's core inflation held steady at 0.9% in December, well below the BoJ's target of 2.0%. This tells us that Japan's economy remains too weak to generate domestic price pressures. So this has weighed on the Japanese yen!

Outlook

That said, looking forward, the yen could find its feet. This is because Japan's economy shows signs of hotting up. For instance, the minutes of the Bank of Japan's last meeting noted that 'economic activity and prices were expected to continue improving.' Furthermore, Japan's exports to China and Asia hit a record high in December, while manufacturing growth rocketed also!

Pound to South African rand

Sterling stays still versus the rand! The pound to South African rand interbank exchange rate ended last week close to where it started, at 16.80.

The rand held firm last week, chiefly because markets are awaiting more information about who'll take over South Africa's presidency. On the one hand, there are rumours that corrupt, embattled president Jacob Zuma may resign early, which would lift the rand. Yet on the other hand, markets doubt whether the ANZ's new leader Cyril Ramaphosa can revive South Africa's fortunes alone!

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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. Andy Bruce, 'Leader to laggard - UK economy loses ground after Brexit vote', January 25th 2018, Reuters.com, https://uk.reuters.com/article/uk-britain-economy-performance/leader-to-laggard-uk-economy-loses-ground-after-brexit-vote-idUKKBN1FE1LD
2. Anonymous, 'Bank of Japan's Inflation dilemma amid strong economic revival', January 26th 2018, TheNational.ae, https://www.thenational.ae/business/economy/bank-of-japan-s-inflation-dilemma-amid-strong-economic-revival-1.698848
3. Eren Sengezer, 'SNB's Jordan: Should not focus on daily volatility in exchange rates', January 25th 2018, FXStreet.com, https://www.fxstreet.com/news/snbs-jordan-should-not-focus-on-daily-volatility-in-exchange-rates-201801251437
4. Graeme Wearden and Nick Fletcher, 'Davos 2018: Donald Trump puts North Korea high on agenda in speech putting 'America first'', January 26th 2018, Guardian.co.uk, https://www.theguardian.com/business/live/2018/jan/26/davos-2018-donald-trump-carney-mcdonnell-world-economic-forum-live
5. Leah Schnurr, 'Canada annual inflation cools in Dec as gasoline prices drop', January 26th 2018, Reuters.com, https://www.reuters.com/article/us-canada-economy-inflation/canada-annual-inflation-cools-in-dec-as-gasoline-prices-drop-idUSKBN1FF1TH?il=0
6. Patti Domm, 'US dollar gets slammed again as Treasury Secretary Mnuchin abandons 'strong dollar' mantra of predecessors', January 25th 2018, CNBC.com, https://www.cnbc.com/2018/01/25/us-dollar-slammed-as-mnuchin-abandons-strong-dollar-mantra.html
7. Paul Vieira, 'Canada Retail Sales Decelerate in November', January 25th 2018, FoxBusiness.com, http://www.foxbusiness.com/features/2018/01/25/canada-retail-sales-decelerate-in-november.html
8. Reuters Staff, 'SNB's Jordan does not believe currency war is imminent - TV', January 25th 2018, Reuters.com, https://uk.reuters.com/article/uk-davos-meeting-dollar-swiss/snbs-jordan-does-not-believe-currency-war-is-imminent-tv-idUKKBN1FE28C
Sandeep Kanihama, 'RBA: AUD strength could delay rate hike - ING', January 24th 2018, FXStreet.com, https://www.fxstreet.com/news/rba-aud-strength-could-delay-rate-hike-ing-201801241227
9. Tetsushi Kajimoto, 'Japan's record exports, manufacturing, point to powerhouse economy', January 24th 2018, Reuters.com, https://www.reuters.com/article/us-japan-economy-trade/japans-record-exports-manufacturing-point-to-powerhouse-economy-idUSKBN1FD01R
10. Theophilos Argitis, 'Canadian Retail Sales Edge Up on Higher Gasoline Prices', January 25th 2018, Bloomberg.com, https://www.bloomberg.com/news/articles/2018-01-25/canada-retail-sales-rise-0-2-in-nov-on-higher-gasoline-prices

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