by Peter Lavelle

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

Pound to euro

Sterling stays strong! The pound to euro interbank exchange rate reached 1.1379 last week, close to its highest in 10 weeks, or since July 14th.To start with, UK retail sales jumped +1.0% in August, well above financial market forecasts for +0.2%. This tells us that Britons remain happy to splash out on the high street. What's more, UK borrowing fell to +£5.093bn last month, the smallest sum for August in 10 years, thus lifting sterling too!

Meanwhile, the euro sank last week, because German chancellor Angela Merkel emerged weaker from the weekend's federal election. In particular, Mrs. Merkel's Christian Democratic party won just 33.2% of the vote, down -8.8%, and the least since 1949. This means that, although Mrs. Merkel will remain Germany's chancellor, she's in a weaker position, thereby weighing down the euro!

Outlook

That said, looking ahead, the outlook for the pound to euro exchange rate is cloudy. This is because, in prime minister Theresa May's Brexit speech in Florence last Friday, Mrs. May neglected to spell out her specific Brexit policies. This leaves the UK's exit negotiations up in the air. What's more, credit rating agency Moody's downgraded the UK to just Aa2, following Mrs. May's speech also.

Pound to US dollar

The pound to US dollar interbank exchange rate holds steady! Sterling held around 1.35 against the greenback last week, close to its highest since June 24th last year, the day after the Brexit vote.

The US dollar ummed and ahhed last week, first because there were mixed tidings from the Federal Reserve. On the plus side, the Fed confirmed that it will begin to ease back its vast stimulus, and intends to hike interest rates once more this year. Yet on the other hand, the Fed's 'dot plot' now signals that interest rates will ultimately settle -0.25% lower than last thought, at just 2.75%.

Outlook

Moreover, the greenback may continue its toing and froing, looking forward. This is because the US economy is blowing hot and cold. On a positive note, US building permits jumped by +5.7%, blowing away forecasts for a -0.8% decline, and boding well for America's construction industry. Yet less positively, US existing home sales fell -1.7% last month, due to tight supply constraints.

Pound to Swiss franc

The pound to Swiss franc interbank exchange rate flies higher! Sterling jumped +1.25 cents against the franc last week, to 1.3150, its strongest since June 24th 2016.

The Swiss franc has dived, chiefly because the Swiss government has cut its 2017 GDP growth forecasts, by -0.5%, to just +0.9%. If Switzerland's economy grows at this pace, it will be the slowest since 2009, just after the financial crisis. In particular, the Swiss government reckons that GDP will rose more slowly, as Switzerland's service industries grow slower than manufacturing.

Outlook

That said, looking ahead, the franc may find its feet. This is because, first, with the franc weaker, the Swiss National Bank may intervene less in the forex market, to limit the franc. Moreover, traders may soon turn to the franc as a haven, as Pyongyang has threatened to drop a nuke into the Pacific, in response to Donald Trump's promise to 'totally destroy' North Korea at the UN.

Pound to Australian dollar

Sterling shoots for the moon versus the Aussie! The pound to Australian dollar interbank exchange rate jumped +0.5 cents last week, up to 1.7025, its highest since July 6th, or 11 weeks.

The Australian dollar has deflated, first because the price of iron ore, Australia's biggest export, has fallen -13.7% in the last 6 trading sessions to $66.09 a tonne, its weakest since July 17th. This has weakened the AU dollar, because Australia will now make less revenue from its iron ore exports! In addition, the AU dollar has also struggled, as concerns grow about China's debt bubble too.

Outlook

What's more, looking forward, the pound could continue to lose out versus the AU dollar. This is because Reserve Bank of Australia governor Philip Lowe has played up the risks to Australia's economy, in a speech. For instance, Mr. Lowe said that 'over the past four years, the increase in average hourly earnings has been the slowest since at least the mid 1960s,' hitting the AU dollar!

Pound to New Zealand dollar

The pound to New Zealand dollar interbank exchange rate jumps! Sterling rose +2.5 cent against the kiwi last week, to 1.86, its strongest in 17 weeks, or since May 19th.

The New Zealand dollar lost out, chiefly because in New Zealand's election over the weekend, neither the ruling National nor opposition Labour won a majority to govern. This has weakened the kiwi, because this raises the prospect of weeks of negotiations, to form a coalition government. In particular, both National and Labour will aim to partner with the smaller New Zealand First party.

Outlook

That said, looking ahead, the New Zealand dollar may find its feet. This is because New Zealand's economic growth remains solid. To be specific, the Middle Earth economy expanded by +0.8% in Q2, as forecast, faster than most other industrialised nations. In particular, New Zealand's GDP bounded upward, as goods exports grew at the fastest pace in 20 years, especially dairy products.

Pound to Canadian dollar

Sterling makes tracks versus the loonie! The pound to Canadian dollar interbank exchange rate inched up +1 cent last week, to 1.67, close to its highest in 11 weeks, or since July 6th.

The Canadian dollar ran out of steam last week, first because the price of oil, Canada's biggest export, fell -0.3%, to US$50.55 a barrel. Given this, Canada will make less revenue from exporting the black liquid gold. Furthermore, the CA dollar also struggled, as Canada's manufacturing shipments fell -2.6% in July, beyond financial market forecasts for a smaller -1.6% drop in shipments.

Outlook

In addition, the loonie dollar could continue to sink, looking ahead. This is because, first, the US Federal Reserve remains on course to hike interest rates once more this year. This will eat into the Bank of Canada's interest rate advantage, cutting demand for the CA dollar. Also, Canada's inflation rose to just +1.4% in August, -0.1% below forecasts, cutting the odds of a further BoC hike.

Pound to South African rand

The pound to South African rand interbank exchange rate stands still! Sterling held close to 17.94 against the rate last week, close to its highest in 10 months, or since November 14th 2016.

The South African rand stood its ground last week, chiefly because the South Africa Reserve Bank (SARB) unexpectedly held interest rates steady at 6.75%. This was in spite of widespread expectations that the SARB would slash borrowing costs by at least -0.25%, to support GDP growth in the springbok state. Hence, with the SARB firmly on hold, the rand went nowhere fast too.

Outlook

On the other hand though, the rand may weaken in future. This is because the SARB forecasts that South Africa's economy will expand by a measly +0.6% this year, with risks 'slightly on the downside'. What's more, if South Africa's economy decelerates or returns to recession, the SARB may be compelled to cut interest rates, while other countries like the UK and USA raise rates.

Pound to Japanese yen

Sterling hops, skips and jumps higher versus the yen! The pound to Japanese yen interbank exchange rate rose by +1.02% last week, up to 152.13, its highest since June 10th 2016.

The yen sank beneath the waves last week, chiefly because the Bank of Japan held interest rates at -0.1%, while maintaining its vast stimulus. In particular, new board member Goushi Kataoka argued that the BoJ should even expand its easing, to lift inflation to the bank's 2.0% target. Given that other central banks like the Fed, BoE and ECB are looking at hiking, this hence hurt the yen!

Outlook

That said though, the yen may soon find its mojo. This is because Japan's GDP rose by a mighty +2.5% in Q2, well above the trend rate. This points to the success of prime minister Shinzo Abe's economics program, Abenomics. What's more, the yen could also strengthen as a safe haven, as North Korea chief Kim Jong-Un has threatened to set off a hydrogen bomb in the Pacific Ocean.

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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.