Sterling exchange rates have been improving over the last 7 days with GBPEUR and GBPUSD rates both bouncing up from multi month lows a week ago. The question that many have asked is whether these gains are short term opportunities or long term changes in trend. The Sterling report below looks into the factors impacting Sterling rates, including the pending interest rate decision from the Bank of England today. The table below shows the range of exchange rates for a number of currencies, showing the diference in return you could have achieved when selling £200,000.00 during the past month.
|Currency Pair||% Change||Difference on £200,000|
The pounds direction has really been driven by two main topics; economic data and politics. Economic data for the UK has been mixed with great job creation however productivity has been falling. UK GDP figures for example has risen by just 2.2% since 2010, which is less than a third than in Germany over the same period. UK Wage inflation has been poor and fallen 1.6% since 2010 whereas in German wage growth has increased by over 10%. The UK is generally job rich but wage poor and this puts the Bank of England (BOE) in a difficult situation whereby some data suggests that interest rates should start climbing and others suggest it should stay on hold. It is this changing view and the markets perception on whether or not the BOE will raise interest rates that has been one of the main factors in the Pound's changing value.
The BOE are due to meet on Thursday to make their decision on any policy and forecast change. 6 weeks ago there was a suggested 80% likelihood of rates raising but that dropped down to nearly 30% last week as wage growth slowed to 2.5% in the three months to May, the slowest pace in six months, UK retail sales recently also unexpectedly fell by 0.5% in June and UK inflation remained below expectations, this all resulted in the drop in Sterling’s value as the likelihood of a rise fell.
The decision by the bank next week could very much drive sterling’s value going forward and could easily impact the cost of buying anything aboard with the Pound. My personal view is that they will probably not raise interest rates but suggest that they are open to it later this year – this, I think, will result in some Sterling strength on the day.
They could alternatively however raise rates which could push the pound up quite healthily, not comment on future hikes or even contract growth forecast and the future timelines of hikes, which could in turn result in the pounds value falling sharply. There is a lot of uncertainty about this event and the prospect of a large change in price is a real possibility.
The other topic for the change in Sterling’s fortunes recently has been the slight improvement in Brexit.
With the PM announcing that she will take the lead in negotiations it has given the market a little more optimism of some success and increased the likelihood of a ‘softer Brexit’. A softer Brexit is deemed better for the city and has in the past driven investment into the pound making it more valuable.
Over the coming week the Pounds value will be driven by data releases including an update on the housing sector on Monday, Manufacturing data on Wednesday and the BOE update on Thursday. Personally I see the housing sector showing a contraction along with the manufacturing sector so expect the Pound to slide downwards before next Thursdays decision. Good news probably for GBP buyers however GBP Sellers might want to avoid this potential fall.
For more information on how future data releases could affect your currency requirement, call our trading floor on 01494 725 353 or email me here.
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