The pound strengthened against both the euro and US dollar over the last week. GBP has gained against the EUR and USD with GBPEUR interbank levels close to 1.12 at the time of writing and GBPUSD pushing towards 1.26 mark on the interbank rate.
This is GBP/USD’s highest point in over seven weeks, or since April 15th. Sterling strength has come partly due to the UK economy showing tentative signs of recovering from the COVID-19 crisis. For example, yesterday we learnt that the UK’s IHS Markit Services PMI (Purchasing Managers’ Index) data, covering around 80% of Britain’s economic activity, rose to 29.0 in May from 27.8 in April. This points to very welcome green shoots for the UK economy as some lockdown measures are gradually eased.
Looking ahead, the pound’s value could be affected by ongoing Brexit trade talks. The latest round of negotiations began this week, with both sides locked in their respective positions and the deadline for the end of June. Rumours of a compromise have spread and hopes that Prime Minister Boris Johnson will make another dramatic intervention, very similar to what he did regarding Northern Ireland’s border shortly after he entered 10 Downing Street, to move the talks forward. If so, this could be worth watching out for, and may affect sterling exchange rates.
From an economic data standpoint tonight we have GFK Consumer confidence which is forecast to demonstrate a drop which is perhaps unsurprising considering the current economic conditions. This data set is to be released outside of trading hours but if you have a currency requirement and would like to benefit from any possible market movement speak to your account management about limit orders.
Euro exchange rates have come under pressure over the past week, partly due to forecasts that Eurozone’s economic growth in 2020 remains dire as a result of the coronavirus pandemic.
All in all, the European Central Bank (ECB) forecasts that the common currency bloc will contract by -9% this year, which is its highest contraction since WWII, while inflation will remain near 0%.
As a result, it is thought that the ECB may expand its vast COVID-19 response package today, the Pandemic Emergency Purchase Program, when it convenes at 11.45 GMT for their latest interest rate announcement. The ECB have already come under pressure and in March the central bank unveiled a €750 billion stimulus, called the Pandemic Emergency Purchase Programme (PEPP), to support the Eurozone.
There is a high probability that the ECB could add to this with forecasts of between €250 to €500 billion. If this is announced it will greatly increases the quantity of euros available on the financial markets, which historically tends to weaken the currency’s value. However, markets may take this decisive action as a positive as it will demonstrate the Central Banks support for the 27 nations.
In addition to the ECB’s stimulus package talks continue within the single currency bloc regarding the European Councils proposed €750bn recovery fund. Similar to the ECB’s stimulus package this is designed to help deliver economic recovery for all EU nations, however, this fund is to be made up of grants and loans which will increase the borrowing of the 27 nations. With some of the countries already having high amounts of borrowing there could be some reluctance to increase these levels, while some of the more financially independent countries such as Sweden, Denmark and the Netherlands are thought to currently be against the proposal. As per the ECB’s package, if we see an agreement on this, which could take weeks, it could provide some support to EUR exchange rates so if you have a currency transfer to make it could be worth staying in contact with your account manager who can keep you up to date with the latest news.
The pound strengthened sharply against the US dollar over the last few days touching upon a seven-week high. You may find this surprising because the USA’s latest economic data has been surprisingly positive.
An example of the recent stronger than forecast data was the IHS Markit’s composite Purchasers Managers Index (PMI), measuring output in services and manufacturing, which rose to 37.0 in May, this was 0.6 above April’s figure of 36.4. In addition, we also know that US factory orders fell by just 13% in April, although this does not seem a positive number, actual figures were forecasts for a 14% decline.
While we would ordinarily expect upbeat economic data to benefit a nation’s currency, strong US outperformance often weighs on the so-called greenback, because of its safe haven status. As a result, when investors see the American economy is performing well, confidence rises enough to buy non-USD denominated assets elsewhere in the world, thereby weakening the dollar.
Looking forward to the rest of the week, tomorrow the key data will be US Non-Farm Payroll figures for May, this data measures job created in the USA outside the seasonally effected agricultural sector and is released on Friday at 12.30 GMT. This is forecast to show a fall of 8,000 jobs, which would easily be above April’s 20,500 decline. This afternoon we will see the latest US initial jobless claims which combined with the non-farm payroll will help paint a clear picture of the US labour market and any reading worse than the forecasted figure will demonstrate the strain the US is currently feeling from the pandemic and could cause USD volatility. If you need to make a USD transfer then speak to your account manager who will be happy to act as your eyes and ears on the market to keep you informed of the latest news to help you make an informed decision on when to convert you currency.
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