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Pound Wobbles Versus Euro and US Dollar, as UK GDP Downgraded

Image credit: Nimalan Tharmalingam.

by Peter Lavelle

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

Pound to euro

Sterling wobbles versus the common currency! The pound to euro interbank exchange rate fluttered between 1.1325 and 1.14 last week, close to its highest since mid-June.

The pound went up and down last week, because the UK economy enjoyed mixed fortunes. On the bright side, UK retail sales hit their highest in 2 years in September, according to CBI's distributive trades survey. Meanwhile, UK consumer confidence reached a 4-month high, says GfK. Yet less positively, UK Q2 GDP was downgraded -0.2% to just 1.5%, the least since 2013.

Meanwhile, the euro hithered and thithered last week too. This is because, first, German chancellor Angela Merkel's Christian Democrats underperformed in the federal election, while the far right AfD gained. This will make it tough for Mrs. Merkel to form a new government, while pointing to the rise of populism in Germany. Yet more positively, German joblessness fell to 5.6% in September.

Outlook

That said, looking ahead, sterling could make strides versus the euro. This is because, first, EU chief negotiator Michel Barnier has said that there's a 'new dynamic' in the Brexit talks. This bodes well for a transition period, and a trade deal. Meanwhile, the euro could lose out, because Eurozone inflation unexpectedly held at 1.5% in September, below market forecasts for a rise to 1.6%.

Pound to US dollar

The pound to US dollar interbank exchange rate slides! Sterling sunk -1.25 cents against the greenback last week, to 1.3350.

The US dollar won out last week, chiefly because the US economy is on a roll. To start with, US Q2 GDP was upgraded by +0.1%, to 3.1%. This is America's fastest economic growth since Q1 2015. Moreover, US initial jobless claims have now held below 300,000 for 134 straight weeks, the most since 1970. This points to the continuing strength of the US job market, boosting the buck!

Outlook

What's more, the greenback could rise further, looking ahead. This is because, first, President Trump has unveiled his tax plan, in which he intends to cut taxes for most Americans and businesses. In addition, Fed chief Janet Yellen reiterated that she intends to lift US interest rates again this year, saying that it would be 'imprudent to keep monetary policy on hold until inflation is back to 2%.'

Pound to Swiss franc

Sterling stays still versus the franc! The pound to Swiss franc interbank exchange rate held close to 1.30 last week.

The franc stayed in neutral last week, because on the one hand, investors sold the franc, as the market decided that the USA's tensions with North Korea were overblown. Yet on the other hand, more positively, KOF's leading indicator for Switzerland jumped +1.6 points in September, to 105.8, while ZEW's Swiss expectations survey jumped +3, to 25. This data supported the franc!

Pound to Australian dollar

The pound to Australian dollar interbank exchange rate rises! Sterling jumped +1.5 cents against the Aussie last week, to 1.71, close to its highest in 16 weeks, or since June 8th.

The Australian dollar deflated last week, because the Reserve Bank of Australia looks unlikely to lift interest rates above their current 1.5%, unlike the Fed or BoE. In particular, RBA assistant governor Michele Bullock said last week that, 'with my worry hat on, high levels of debt do leave households vulnerable to shocks.' Aussie household debt recently hit an all-time high of 190%!

Pound to New Zealand dollar

Sterling sticks to its guns versus the kiwi! The pound to New Zealand dollar exchange rate held between 1.85 and 1.8550 last week, close to its highest since early-May.

The kiwi dollar stayed on the back foot last week, chiefly because the Reserve Bank of New Zealand held interest rates at 1.75%. What's more, acting governor Grant Spencer was notably downbeat, saying that rates will remain 'accommodative for a considerable period' and that 'headline inflation is likely to decline in coming quarters'. This therefore weighed heavily on the kiwi.

Outlook

Moreover, looking ahead, the kiwi dollar may stay low. This is because, first, New Zealand's trade deficit ballooned to -NZ$1,235m in August, as NZ dairy exports eased. What's more, following last week's inconclusive election, both the National party and NZ Labour are wooing the populist New Zealand First party, to form a government. This uncertainty may weigh on the kiwi economy.

Pound to Canadian dollar

The pound to Canadian dollar interbank exchange rate stays high! Sterling held between 1.6650 and 1.67 last week, close to its highest since July 6th, or 12 weeks.

The Canadian dollar was stuck in the mud last week, chiefly because Bank of Canada governor Stephen Poloz played down the odds of lifting interest rates further above 1.0%. In particular, Mr. Poloz said that the next move in interest rates could be 'in either direction', and that he 'will closely watch the exchange rate'. This suggests that the BoC prefers the Canadian dollar to weaken!

Outlook

Furthermore, looking ahead, the CA dollar could drop further. This is because Mr. Poloz also played up the risks to Canada's economy, noting that 'the Canadian economy is not well prepared for a negative shock to the economy'. In particular, household debt in Canada stands at 175%, the 8th highest in the OECD. Also, the CA dollar may fall, as Canada's GDP stagnated at 0.0% in July too.

Pound to South African rand

Sterling flies high versus the rand! The pound to South African rand interbank exchange rate jumped +0.5% last week, to 18.04, its highest since November 11th last year.

The rand dived for cover last week, chiefly because investors are nervous, ahead of the ruling party ANC's upcoming leadership contest. In particular, it's feared that Nkosazana Dlamini-Zuma, ex-wife of current ANZ chief Jacob Zuma, may win the contest. If so, Mrs. Dlamini-Zuma intends to continue Mr. Zuma's platform of 'radical economic transformation', thereby weighing on the rand.

Pound to Japanese yen

The pound to Japanese yen interbank exchange rate stays in cloud nine! Sterling held near to 150.50 against the yen last week, its highest since June 3rd 2016.

The yen struggled last week, chiefly because Japan's inflation held at 0.7% in August, as forecast. This weighed on the yen, because this is well below the Bank of Japan's target of 2.0%. In turn, this cuts the odds that the Bank of Japan will hike interest rates above their current all-time low of -0.1%, at a time when the US Federal Reserve, Bank of England, and ECB are looking to hike.

Outlook

That said though, the yen may rebound, looking ahead. This is because, first, Japan's industrial production rose +5.4% in August year-on-year, +0.2% above forecasts. This points to Japan's continuing economic comeback. What's more, prime minister Shinzo Abe has called a snap election, which he's predicted to win easily. If Mr. Abe triumphs, this will add to Japan's political stability.

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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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