The following currency report will examine the factors that could affect Sterling exchange rates.
It was a busy day for the UK yesterday following the latest budget announcement and a host of key economic data releases. UK Chancellor George Osborne came out fighting, as he declared Britain is ‘walking tall again’ and urged votes not to let the recovery slide. It will be interesting to see how the budget is dissected over the coming days but the initial reaction by opposition leaders claim it is a budget to gain favour amongst voters and not one which is sustainable.
Growth forecasts have been raised for 2015 & 2016 to 2.5 and 2.3% respectively and although it did give the Pound a slight boost, it did little to help recover the heavy losses witnessed on GBP exchange rates over the past few days.
These losses on GBP continued yesterday morning following the release of the latest BoE minutes & UK unemployment figures. Whilst the BoE minutes came out as anticipated, with all 9 members voting against changing interest rates, unemployment came out worse than expected and remained unchanged at 5.7%. This knocked GBP/EUR rates, which had already taken a hit following Mark Carney’s speech last week. The pair dropped below 1.38 at the low and we are now trading almost 5 cents lower than the high of last week, a key indication to me that Sterling’s recent momentum is slowing.
I feel the Pound will now struggle to break back above 1.40 in the short-term, with the BoE keen to control Sterling’s value for fear of alienating our trade partners. It is also likely that we are seeing a general realignment following a sustained rise for the Pound and for this reason I would be very tempted to consider my position around the current levels if I had EUR to purchase over the coming weeks.
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The FED modified their stance on interest rates during last night’s statement, although their base remained unchanged for the time being. They removed the word ‘patience’ from their regular statement, language that was seen as an indication that a rate change would not be seen for at least a few months.
There was a huge amount of volatility on GBP/USD rates during the decision and subsequent statement, with Sterling hitting a high of 1.5068, before falling back sharply by almost two cents.
The FED still said that it wants to see ‘further improvement’ in the US labour market before raising their base rate but it does now seem this is far more likely to happen in the US before we see the BoE do something similar in the UK.
Despite this more positive outlook Chair of the Federal Reserve Janet Yellen did not commit to any specific timeline and sceptics may argue this statement does not tell us anything new. However, considering the weak run of data that came out of the US recently, including poor Retail Sales figures, many analysts will argue this is the first step towards a US rate hike over the coming months.
GBP/AUD rates dipped towards 1.92 at the low yesterday before Sterling recovered following last night’s Reserve Bank of Australia (RBA) bulletin. The RBA sighted concerns in the slowing Chinese housing market, as a huge concern for Australian exporters.
The outlook for the Chinese property market is relevant to the Australian economy due to China’s high demand for their raw materials, such as coal and Iron Ore.
Due to the volatile nature of the currency pair, it is difficult to predict whether this trend will continue, as it is not unusual to see aggressive swings in a very short space of time. Personally I feel there is still more chance we will see the pair move back toward 2, than trade under 1.90 for any sustained period.
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