Despite some underwhelming UK Construction figures released on Friday morning, the Pound managed to hold onto much of its recent gains against its peers. This Pound Sterling article looks at the current situation and why the Pound is performing so well. The table below shows the movements for a number of GBP currency pairings so far in 2018:
|Currency Pair||% Change||Difference on £200,000|
It’s been a very strong start to the year for GBP exchange rates after its begun to appear that the Brexit transitional agreement could be agreed shortly, with the latest update from Theresa May (UK Prime Minister) suggesting it could be agreed within the next 7-weeks.
Sterling was also boosted after figures showed that the UK economy outperformed all expectations last year, growing by 1.8% and even wage growth appears to be climbing now. The pickup in wage growth has led to increased bets on a rate hike this May, boosting the Pound’s value recently.
To put Sterling’s performance this year into perspective for those of our clients planning on exchanging Pounds into another currency, GBP/USD has gained by around 5%, GBP/CAD by 3%, GBP/AUD by 2.5% and GBP/EUR by almost 2%. The latter being perhaps the most significant as its come at a time that the Euro is strengthening against all major currency pairs except the Pound.
Whilst there are many positive forecasts out there suggesting the Pound could continue to climb, such as Coutts proclaiming that part of their investment strategy rests on GBP gaining against the USD, EUR and JPY throughout the year. There are of course potential risks which could scupper Sterling’s strong start to the year.
The politically based risks remain with infighting throughout the Conservative government, potential issues between UK and EU trade negotiations, the possibility of a Corbyn lead government drastically changing the Brexit plans, the rise of other potential Conservative leaders such as Boris Johnson or Jacob Rees-Mogg entering the frame, as well as a turn-down in the UK economy all have the potential to weaken Sterling.
The Bank of England is also now presented with a headache which could influence the currency going forward, certainly between now and May as a surprisingly strong global economy has led many other central banks to begin raising base rates of interest which the BoE may opt to follow. I would expect to see comments from Mark Carney referring to this possibility to influence GBP exchange rates
As mentioned earlier, construction in the UK stagnated in January, mostly owing to a slump in new property developments with the Purchasing Managing Index reading just above 50 after forecasts of 52. Those concerned with the Pound's value and how it will perform as the year goes on should consider following the PMI readings in future for construction, manufacturing and especially the services sector. These readings indicate whether business expectations for the upcoming months are positive or negative, with 50 being the key mark.
We often speak about past performance of an economy, but I think these readings provide us with a more forward outlook which could help some clients make a decision on whether they wish to run the risk of GBP losing its recent gains.
With this in mind Services PMI will be released at 9:30am with an expected reading of 54.2 expected. There will also be an interest rate decision from the Bank of England at 12 on Thursday with no changes expected, but any allusions to future monetary policy may move the markets. Feel free to get in touch if you wish to plan around these or any other events on your radar.
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