The pound has managed to continue its gradual climb against its major currency counterparts despite the heightened tensions in parliament yesterday evening. Multiple key factors hit the headlines which may well be sowing the seeds for the next movement in the currency markets, but thus far all seems to be working in sterling's favor. The GBP has reached a 6-week high against the dollar at 1.238 and drawing ever closer to that all important 1.12 mark against the euro.
The House of Lord’s passed bill preventing no-deal late on during yesterday's trading following approval from Queen Elizabeth. By forcing PM Johnson to seek a 3-month extension should he fail to break the deadlock before the end of October, the bill limits the immediate risk of a cliff edge Brexit for now, which since the referendum has most likely been the main variable anchoring sterling exchange rates. Time will tell if Johnson will follow the rules laid before him however, particularly now the much criticized 5-week parliament shutdown begins.
The latest Reuters poll suggested economists still see a 35% chance the UK will crash out of the EU without a deal, with a strong majority expecting an extension past the October deadline. US investment firm BlackRock ($6.8 Trillion worth of assets) told their clients they see the likelihood of a no deal Brexit rising too, as too that of a second referendum.
Yesterday the PM seemed confident he could clinch a deal with the EU at the next summit on the 18th of October, seemingly the last chance before the deadline.
Aside from the political sphere, the pound received some welcome news from the latest Investec report, predicting a rise in UK GDP until the end of 2019 to 0.3% following Q2s worrying fall in growth to 0.2%. It will be interesting to see if this positivity filters down to this morning’s key employment and average earnings releases which could well set the tone for the rest of the week.
With the EU’s uncertainty from both clashes with the US and China, alongside ongoing Brexit talks, a lot of the euro’s weight in the market has arguably been anchored in recent months. Business confidence seemed to be wavering and as a result the single currency’s run of consistent inroads against its major currency counterparts seemed to peak fairly early on. Despite this, investor confidence seems to have reignited this month with the latest Sentix release showing a jump up to -11.1 from last month’s -13.7. The uptick in moral could well be linked to a slightly more cooperative Italy, now that the leading coalition between the 5-star movement and the PD parties seem to be striving for pro- EU solutions.
Equally, it will be interesting to see if further optimism spreads from Germany as the powerhouse releases plans for a “shadow budget” set aside to bolster investment in public infrastructure and stimulating growth within the jobs market.
After Friday’s disappointing jobs data, the US dollar has struggled to gain much traction against its major currency counterparts so far this week. With peace talks in Afghanistan put on hold for the foreseeable you could have expected USD exchange rates to rise as a result of its safe heaven status. However, the dollar has continued to lose ground against the EUR and the GBP, potentially highlighting an underlying lack of faith in the US economy moving forward.
As a result, yet another interest rate cut from the Federal Reserve looks likely, this Wednesday inflation data might be the next market mover for US dollar exchange rates.
We look set for quite the interesting week for Yen exchange rates with a conservative reaction from Japanese consumers seemingly relaxing the markets. Japan’s plans to hike Consumption tax in October had weakened the Yen’s position considerably on the international stage, with investors remembering all too well how the equivalent hike back in 2014 pulled the Japanese economy into recession. Back then, consumers activity spiked in the build-up before drastically slumping once the rise was imposed. This time however, consumption seems much more subdued, potentially providing an underlining level of support to the JPY in the weeks and months ahead.
This might be tested this week with key manufacturing and foreign investment data due out on Wednesday evening. Both of which have shown relatively meagre levels of growth since the start of the year.
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