On Tuesday, UK officials will be heading to Brussels to continue the ongoing Brexit trade talks. Over the last couple of weeks both sets of negotiators have had time off following the intense 5-week discussions throughout June and July. Progress was made within the 5-week period as the UK accepted the future relationship between the UK and EU will be governed by one treaty and the EU accepted that the European court of Justice will not dictate UK-EU relations.
Following the 5-week period of negotiations, head EU negotiator Michel Barnier told the press that a deal was still unlikely as there were still many issues that needed to be overcome. However last week the UK Chief negotiator David Frost told the media that he believed a deal could be reached in November. Markets are not expecting a deal to be reached this week, however if there is any positive news regarding fishing rights or the issue regarding level playing field guarantees, this could give the pound a well needed boost. However, with the Chief negotiators hinting that a deal could be reached in September, history tells us that the EU tend to strike deals at the last minute, therefore it could be another week of deadlocked talks.
The key data releases to look out for this week are inflation at 7am Wednesday and Retail sales also at 7am but on Friday. Since the UK entered lockdown in March inflation has edged lower month on month from 1.5% to 0.6%. This is because the demand for certain goods and services has dropped which means price has fallen in line. Due to the UK Governments reopening of the economy at the end of June, inflation is set to rise slightly which is good news for sterling. However, if market commentators have it wrong and inflation remains at 0.6% or worse, it could be a tough Wednesday morning for sterling.
In addition, Retail sales numbers for the UK over the last 2 months have been impressive as shoppers either flocked to the high street or found ways to spend online. It appears that the bounce back has come to end as Retails sales is set to be released at 2%, baring in mind the June release was 13.9%.
Since the 20th March when countries all over the globe started to go into lockdown and investors flocked to the safe haven US dollar, GBPUSD (cable) has steadily increased. Back on the 20th March cable mid-market exchange rates were trading in the high 1.14s and at the time of writing this report cable is now trading above 1.30 which is a 13% increase.
Of course as economies started to reopen investors started to move away from the US dollar and invest in other assets, therefore it’s no surprise cable exchange rates have increased, however with the UK being heavily impacted by Covid-19 and the ongoing Brexit saga, it just shows the US dollar has problems of its own.
Throughout July the US dollar declined at levels we have not seen in over a decade. The Dollar index, which measures the Greenbacks performance, dropped 4.4% which was the highest drop since September 2010. It appeared that investors were once more ploughing their money into the stock market as Apple, Facebook and Amazon share prices all increased dramatically.
Clients that are involved in US dollar exchange rates could keep a close eye on the stock market, however the US election and Covid-19 could also have a major impact on the value of the US dollar.
President Donald Trump appears to be finding himself in hot water on a regular basis and even decided to cut his own press conference in the White house short earlier this month, due to the pressure from the media. History tells us that in the run up to a close fought election, this puts pressure on the currency. Will history repeat itself? Regarding Covid-19, the US is still averaging 50.000 news cases a day. If this continues to spiral out of control and further state lock down materialise, the US economy could come grinding to a halt once more.
Even business tycoon Warren Buffett the owner of Berkshire Hathaway appears to be having doubts about the US economy. Mr Buffet decided to sell off shares in Wells Fargo and JPMorgan Chase to purchase 21million shares of Barrick Gold. This is a major surprise as My Buffet is known for talking down Gold. In the past he has even said ‘it has not utility. Anyone watching from Mars would be scratching their head’.
Due to the recent demise of the US dollar, the euro has been performing well. EURUSD is the most traded currency pair globally, therefore you tend to find when one currency weakens the other strengthens. Over the last 5 months EURUSD has increased by 11% from 1.0650 to 1.1850. If the US dollar demise continues, I expect the Euro will continue to strengthen and this could put pressure on GBPEUR exchange rates.
This week the key data release to look out for is inflation Wednesday morning. Inflation over the years has been a big problem for the Euro and the Central bank has tried to combat inflation using rock bottom interest rates and high levels of quantitative easing (Q.E.). For clients involved in Euro exchange rates, keep a close eye on this data release as the European Central Bank fear inflation levels falling to lows seen throughout 2015/2016.
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