In recent weeks the Pound has had a good run against most major currencies. GBPUSD and GBPAUD reached levels that we were accustom to before the Brexit vote in June 2016 and GBPEUR exchange rates reached an 11 month high. However the Pound took a tumble throughout Wednesday and the Thursday morning trading sessions as UK inflation fell to 2.5% from 2.8% and Retail Sales plummeted to -1.2%.
The table below shows the market movements for a number of GBP currency pairings in the last 30 days:
|Currency Pair||% Change||Difference on £200,000|
The Pound started to recover some of the losses throughout yesterday afternoon until Governor of the Bank of England Mark Carney told the BBC after trading hours that an interest rate rise is likely this year, however he didn’t hint to a hike in May which was seen as extremely dovish to investors. He went on to say Brexit negotiations and the performance of the UK economy will dictate when the hike occurs. Following the interview the Pound plummeted over a cent against the Euro and US Dollar.
Mr Carney touched on it last night that inflation needs to be monitored closely, but I believe inflation is more of a problem than the Governor made out. With inflation falling back towards the Bank of England’s 2% target some of my clients have asked why the Pound has not actually strengthened. The problem is that inflation has fallen too quickly and this is the concern.
With the value of the Pound rising compared to 6 weeks ago and arguably this is due to Brexit sentiment improving and the market pricing in that an interest rate hike from the Bank of England will occur in May, Governor of the Bank of England Mark Carney will be wary that if the UK secure a deal with the EU towards the back end of the year, Sterling could rise dramatically, which could cause a problem for UK inflation.
When a currency strengthens dramatically everyday items become cheaper, good news for people buying their groceries. However the knock on effect is that inflation could plummet considerably. Consequently the Governor of the BoE Mark Carney will not want to tighten monetary policy and then find inflation falls back towards 0% if a deal is struck with the EU.
When a central bank raises interest rates a common trend is to see the currency strengthen and this normally happens before the event as investors second guess the central bank’s decision. Now that a hike is not guaranteed for May and exchange rates have dropped, I still believe now is a good opportunity to buy foreign currency, for two reasons.
Firstly, I still believe there is a good chance the Bank of England will raise interest rates in May, however Mark Carney’s speech shortly after I believe will be extremely dovish. I expect his speech will be similar to last night's. Furthermore the Governor delivered a similar speech the last time the Bank of England hiked rates and this caused the Pound to lose ground against all major currencies.
Secondly, there have been limited Brexit developments over the last couple of weeks, but that is set to change as the all-important trade talks are set to begin as developments need to be made by the EU summit at the end of June. This was what the Governor was eluding to last night. Over the last 18 months, every time the UK and EU start to discuss a part of Brexit, the early negotiations never go to plan and I’m not surprised as the art of negotiation is not to put all of your cards onto the table early on. Therefore I expect more of the same and the commentary coming from the negotiations short term to be negative. Arguable trade is the most important element of Brexit and therefore these negotiations could cause the most amount of volatility we have seen so far since the UK voted out of the EU. This is the reason why I believe now is a fantastic time to buy foreign currency if you are purchasing in the upcoming months due to the risks the Brexit negotiations could cause.
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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