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Pound Strengthens Versus Euro and US Dollar, as BoE Set to Hike Rates

Image credit: Nimalan Tharmalingam.

by Peter Lavelle

Welcome to Pure FX’s monthly summary of the interbank foreign exchange rates.

• The pound got up off the mat in September, as the Bank of England hinted that it may soon lift UK interest rates, and the Brexit talks went better.

• The euro caught a nasty cold last month, as German chancellor Angela Merkel underperformed at the federal election, and Catalonia threatened to secede from Spain.

• The US dollar slipped on a banana skin last month, as Hurricanes Harvey and Irma look set to weigh on US GDP, while America shed -33,000 jobs in September.

• The Australian dollar walked blindfolded off a cliff in September, as the RBA looks set to keep interest rates at 1.5% for the foreseeable future.

Pound overview

Sterling gets up off the mat and bounces back! The pound gained against most major currencies in September, including the euro, US dollar and Australian dollar.

Why? Well, it's chiefly because the Bank of England (BoE) has strongly hinted that it will lift UK interest rates in November, above their current all-time low of 0.25%. For instance, BoE executive Gertjan Vlieghe recently said that an interest rate hike 'might be as early as in the coming months.'

What's more, the pound also took a running jump, as the Brexit talks went better. In particular, EU chief negotiator Michel Barnier has commented that there's a 'new dynamic' in the discussions.

All that said though, sterling may soon bump against a glass ceiling. This is because, first, UK GDP expanded by just +1.5% in Q3 year-on-year, the least since 2013. What's more, there's speculation of a leadership contest in the Conservative Party, following prime minister Theresa May's conference speech.

Pound to euro

Sterling claws back ground versus the euro! The pound to euro interbank exchange rate jumped +2.75 cents over the course of September, to around 1.1175. Why? Well first, because German chancellor Angela Merkel unexpectedly emerged weakened from last month's federal election, while the extreme right made gains.

What's more, wealthy Spanish province Catalonia held an illegal independence referendum vote, and looks set to cede from Spain imminently. That said though, Eurozone business activity hit a 4-month high in September, which may support the euro in future!

Pound to US dollar

The pound to US dollar interbank exchange rate stands taller! Sterling rose +1 cent against the greenback last month, to around 1.3050. The buck lost out in September, chiefly because it's thought that Hurricanes Harvey and Irma will weigh on America's GDP in the near term, while the US shed -33k jobs in September.

That said though, the US dollar could recover, looking ahead. This is because, first, US unemployment fell -0.2% to 4.2% last month, even as America shed jobs. What's more, Federal Reserve chairwoman Janet Yellen recently said it 'would be imprudent' to keep interest rates low at 1.00-1.25%!

Pound to Australian dollar

Sterling goes to infinity and beyond versus the Aussie! The pound to Australian dollar interbank exchange rate rose +5.25 cents in September, to around 1.6825. Why? Well, it's chiefly because the Reserve Bank of Australia (RBA) looks unlikely to lift interest rates above their current 1.5% in the near future.

In particular, the RBA is concerned about slow wage growth, underemployment and high household debt Down Under. Furthermore, the Aussie also stayed on the back foot last month, as Australian retail sales shrank -0.6% in August, disappointing predictions for a +0.3% rise!

Pound to New Zealand dollar

The pound to New Zealand dollar interbank exchange rate flies! Sterling roared ahead +4.5 cents against the kiwi last month, to close to 1.8450. This is because, first, neither the ruling National party nor New Zealand Labour won a majority, at the general election in September. This means both parties must now negotiate with the populist New Zealand First party, to form a government.

What's more, the kiwi dollar also sank, as RBNZ acting governor Grant Spencer said that 'numerous uncertainties remain', suggesting that he'll hold interest rates at 1.75% for some time to come.

Pound to Canadian dollar

Sterling hops, skips and jumps higher versus the loonie! The pound to Canadian dollar interbank exchange rate climbed +2.75 cents last month, to around 1.64. This is because the Bank of Canada (BoC) has played down the odds that it will lift interest rates higher, above their current 1.0%.

For instance, BoC deputy governor Timothy Lane said recently that the central bank 'will be paying close attention to how the economy responds to the stronger Canadian dollar.' Moreover, the loonie also sank in September, as Canada's GDP stagnated in July, below forecasts for a +0.1% rise.

Pound to South African rand

The pound to South African rand interbank exchange rate soars! Sterling raced ahead +7.79% against the rand in September, up to 17.97. Why? Well first, because business activity in September shrank at the fastest pace in 17 months, raising fears that South Africa could re-enter recession.

Second, there are concerns that the ruling African National Congress (ANC) could elect Nkosazana Dlamini-Zuma, current leader Jacob Zuma's ex-wife, to lead in December. Mrs. Dlamini-Zuma has wants to continue Mr. Zuma's policy of 'radical economic transformation', thus hurting the rand.

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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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