The pound has been showing resilience in protecting its end of month gains against its major currency counterparts with levels remaining relatively rangebound against both the Euro and the US Dollar. You could argue there has been a slight softening in support for sterling however as the markets await for further insight from the UK government and indeed the Bank of England.
With the US federal reserve and the European Central Bank making it clear they are open to further monetary stimulus to help prop up their respective economies, speculation around the potential of negative interest rates in the UK is mounting. According to the latest weekly finance ministry report, lending to UK plc via the governments COVID relief program broke through the £50bn mark. Protecting employment was the main driver to the increase, with the cost of the Coronavirus Job Retention scheme jumping from £31.7bn to £33.8bn in the space of a week.
Up until recently, the Bank of England has remained fairly up beat about the UK’s prospects of a V-shaped recovery however figures like this might begin to tell. The potential of negative interest rates has historically been particularly damaging to the currency in question and so further volatility could be expected if added pressure is drawn to the UK’s central bank to make their plans clear.
As such, tomorrow’s Interest rate decision and subsequent meeting could prove pivotal for sterling exchange rates for the rest of the month. This morning’s Markit Services PMI release may hold extra weight with the markets as a result. Another negative snapshot here could force the Bank of England’s show it’s hand.
Eurostat’s latest producer price index showed a pick-up in June of 0.7% which was greeted positively by the markets as it continues to add to the argument that the infamous V-shaped recovery is beginning to form in Europe. The year on year figure will have also helped, surprising the markets to hit -3.7%, up from the expected -3.9%. A consistent run of price rises across the bloc could potentially spark added interest in the single currency and could begin to dictate the euro’s value on the international stage as we progress through the month. This has already been reflected in this morning’s positive set of business confidence releases across Europe’s major players. If this positivity filters through to this morning’s retail sales data we might see a switch in fortune for single currency holders. Those with a currency requirement involving the Euro might want to get in touch this morning to see what opportunities lay ahead of them.
After last week’s report that the German economy experienced it’s biggest slowdown in over 50 years, shrinking by over 10% at the height of the virus, tomorrow’s Factory orders release from Europe’s powerhouse may set the tone as we end the week. Investors might be keen to see a reaction following the increased stimulus provided by the European Central Bank to ensure the bloc’s largest economy steers clear from further contractions.
As the US economy continues its struggle amidst the grip of the virus, investors might have taken note of Federal Reserve policy makers pushing for added government spending to help control the spread and keep the economy on it’s feet. In fact, Chicago Fed Chair Evans said that if the government relief program is not initiated quickly, consumer spending could slow far sooner than expected. The effects of this could prove damaging for the US dollar and so further releases from the White house since Friday’s debate could prove to be one of the main drivers for the Greenback this week. It could well prove to be a busy second half to the week for USD exchange rates with a long list of data releases holding the potential to draw added volatility. Today’s Business confidence releases and inflation levels from the manufacturing sector could prove to be a major driver for the Greenback with investors hoping for signs of a change in trend as a result of the facilitated lending options provided by US banks. Ultimately, tomorrow’s employment figures might draw the most attention however. With the US government still to agree on it’s revised support program, the continuing and initial jobless claims report from the US department of Labour will be keenly watched as a result.
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