2017 was a very volatile year as currency markets continued to react to the ongoing political and economic developments in the UK and across the world. This article will examine some of the key events of 2018 and offer some insight into what may shape exchange rates if you are considering any currency transfers involving Pound Sterling, Euros, US Dollars or Australian Dollars.
Politics was a key factor in 2017 and I expect this will continue throughout 2018 as the UK works its way through the Brexit process. Europe survived some key political challenges last year in France and Germany but 2018 sees potential for further strife. In the United States Donald Trump’s leadership will remain under scrutiny for its impact on the US economy and the US Dollar. Global issues will also continue to act as a driver on the Australian Dollar. Will the emerging strength of the Chinese economy capture more headlines?
A volatile Pound towards the end of 2017 could feed through into 2018 as a worst case ‘no deal’ scenario following Brexit remains a possibility. The prospect of the US raising interest rates even further may help the US Dollar in 2018 particularly as Donald Trump’s tax reforms have been passed, which should help bolster the US economy. Having performed so well during 2017, it might be the turn of the Euro to struggle in 2018, with the Italian election in March possibly presenting some further political hurdles for the single currency.
Exchange rate fluctuations are ultimately a product of changes in global events and market sentiments towards such developments. As the world and the global economy continue to undergo transformation at the hands of key issues, Trump and Brexit, an awareness and understanding of these issues is essential to securing the best rates of exchange when looking to buy foreign currency.
GBP/EUR has been trading in a fairly familiar range for the end of 2017, with the interbank rate around 1.10-1.14, but this may change in 2018. Progress on the EU Summit has seen Sterling rise, but then ultimately fall as confidence quickly evaporated since there is still much to do on Brexit. There are still many unanswered questions over Brexit that will take time to become clear, it appears the worst-case scenario of a ‘no deal’ could however, be averted. Both the EU and the UK appear more willing to make concessions and this should ultimately see some kind of deal achieved, which is in the interest of UK economy and therefore the Pound.
Longer term this will benefit Sterling, but we could be talking months or years for this to truly manifest in Sterling exchange rates. Brexit talks could still breakdown on various issues including Northern Ireland and Gibraltar in 2018 so clients holding Sterling hoping for big improvements should tread carefully.
Looking to the Eurozone, investors remain concerned with two key events from 2017, the fallout from the German election and also the Spanish Catalonian election. With both issues leading to weaker governments the prospect for the Italian election in March 2018 will only add further weight to these concerns. Just like with the German and Spanish situation, anti-establishment and anti-EU parties gaining position within government could undermine the strength and stability of the Eurozone. Such uncertainty could easily trigger Euro weakness, just like in 2017.
Many unanswered questions over Brexit remain and this is likely to continue to affect GBP/EUR exchange rates throughout 2018.
Another driver on the Euro will be economic policy for the Eurozone. With Inflation still below their 2% target, the ECB (European Central Bank) might need to continue its loose monetary policy for longer. If they do or there is any hint that the ECB will not be putting themselves on a longer-term plan to raise interest rates, the Euro could struggle against Sterling in 2018.
|GBP||EUR||Q1 2018||1.11 - 1.16|
|GBP||EUR||Q2 2018||1.12 - 1.18|
|GBP||EUR||Q3 2018||1.13 - 1.17|
|GBP||EUR||Q4 2018||1.12 - 1.17|
I would expect gentle progress will be made on Brexit, helping the Pound to establish some loose footholds as the year progresses. Greater concern over how the Euro will be affected by politics may weigh on the single currency. Whilst the Pound might rise slightly if the Bank of England look at one more interest rate hike later in the year. Further talk of the ECB scaling back their QE program or ending it will ultimately see the Euro make further inroads against Sterling, regaining any ground given up from political uncertainty in the Eurozone.
The US Dollar gently weakened in 2017 as the very high expectations placed on both the US economy and the US Dollar failed to materialise. You can therefore explain much of the movement on the US Dollar in 2017 on the ‘Trump trade’ and a failure to see the dramatic advances the market expected. 2018 will now be when we can see the evidence of improvements from the Tax reforms passed recently in the Senate. A belief that lower taxes and greater freedom for business would see the US economy soar ahead will be judged on 2018 since most of the proposals make this year the one where the most benefits are felt.
Interest rate hikes are also a key factor for the US Dollar and on paper it would seem that the US Dollar would strengthen on the expectations of a further 3 hikes during 2018, as indicated by the US Federal Reserve. Typically the expectation of a higher interest rate makes the currency concerned much stronger, however with the US Dollar the behaviour is slightly different.
This is because the US Dollar is actually a safe haven currency which means that in times of uncertainty it will strengthen. That is because investors would rather hold US Dollars than other currencies. It is seen as safe and stable, holding the US Dollar ‘protects’ against volatility elsewhere.
This behaviour may also be displayed in 2018 owing to some potentially volatile events which could rock financial markets and cause investors to seek ‘safer’ shores.
A key example is the North Korean situation which could easily see the threat of nuclear war destabilise the global economy. When this situation escalated in 2017 it saw the US Dollar strengthen and this would remain the case in 2018.
Just like the US Dollar strengthens in times of uncertainty, it can actually weaken in times of certainty. This is because if the global economy is performing well (as evidenced by a strong US economy), investors may seek more profitable investments elsewhere. So where investors may previously have taken up US Dollar positions, looking to take advantage of the gains predicted in interest rates with 3 hikes of 0.25% predicted, they might actually be encouraged to look even further afield for higher returns, safe in the knowledge if the US economy is performing well then there is little to fear in investing in riskier (higher yielding) investments globally.
GBP/USD rates have risen to some of the best since the Referendum in 2017, but a stronger Pound, improved global confidence and concerns over the outcome of Trump’s impact on the US economy, could all see GBP/USD climb higher. The range of 1.30-1.35 we have seen for much of Q3-Q4 2017 could now rise to 1.35-1.40 in Q1-Q2 of 2018.
Such a view relies on the Pound holding its head above water and with the prospect of uncertainty from North Korea and Brexit talks struggling, a move below 1.30 again cannot be completely discounted.
US Dollar to Pound exchange rates remain at close to the best in 30 years despite the recent advances of the Pound. I believe 2018 will offer up some real potential for moves higher on GBP/USD so clients looking at buying or selling Dollars against the Pound should be sure to highlight their position so we can monitor the best levels for their transactions.
The Pound has been rising against the Australian Dollar which has presented some of the best rates to buy Australian Dollars with Pounds since the Referendum. The key question now is what lies ahead, 2018 is going to be another tricky year with Brexit uncertainty remaining the central driver of GBP/AUD exchange rates.
A focus on interest rates for Australia will remain the key topic on the Aussie side, there is an ongoing belief the RBA (Reserve Bank of Australia) may raise interest rates in the future. However, where the market felt this was a strong likelihood, it is now looking less apparent hence the weaker Australian Dollar. Personally I feel the Australian Dollar will strengthen in 2018 as we see the prospect of an interest rate hike increase, this could present some better opportunities for those converting Australian Dollar to Pounds. This would be particularly true if Sterling was under pressure over the uncertainty of Brexit.
Another key factor to note for the Australian Dollar is that its performance is linked to its status as a ‘commodity currency’ which means as the price and demand for raw materials it exports, rises and falls, the currency’s value can shift.
Iron Ore is a key example of a commodity that’s price has influenced GBP/AUD movements in recent years. Chinese demand for raw materials has been the key driver on the price of many raw materials, this demand has kept the Australian economy roaring ahead in recent years.
Concerns over a slowdown in the Chinese economy could easily see the AUD weaken in 2018. Many commentators have been talking about a Chinese recession or negative economic events which could trigger AUD weakness for years. The Chinese economy continues to hold its head above water and with the global economy looking likely to remain strong in 2018, I think it will continue to be positive for the Chinese economy and the Aussie Dollar too.
Another global factor is the behaviour of the US Dollar which is the most heavily traded pair against the Australian Dollar. The US Dollar has been strengthening as they raise interest rates and the Australian Dollar loses its appeal. As a higher yielding currency the Aussie is held by investors who wish get a higher return, this is because Australia has a higher interest rate than most other leading economies.
With the US raising their base interest rate to now be almost in line with Australia, the previous trade of holding funds in Australia versus the US loses ground and we are likely to see that as US interest rates overtake Australian ones, the Aussie lose ground to the US Dollar. Currently Australian interest rates are 1.5% whilst the US is 1.25-1.5%. 2018 should easily see American interest rates rise above Australian rates, which could see the Australian Dollar weaken against the Pound as the market prepares for this news.
I see GBP/AUD operating in a range of 1.65-1.80 for the start of 2018, with potential moves lower back into the 1.60’s if the chance of an Australian interest rate hike increases, which is a real likelihood if their data continues to improve. This could see GBP/AUD exchange rates retesting some of the more favourable rates for AUD sellers in 2017, particularly if in the early part of the year we see the Pound under pressure because of Brexit. However, later in the year as the US raise rates and possibly we get clarification on the UK progressing on Brexit, we could easily see GBP/AUD rise above 1.80, although something quite monumental would have to happen to take us back to 1 GBP buys 2 AUD.
If you are considering any GBP/AUD transfer, buying a property in Australia or looking to bring funds back to the UK from Australia, 2018 has a number of potential events which could create some excellent opportunities for well-prepared buyers and sellers.
In any event, our currency experts are on standby to answer any of your questions, so feel free to call our trading floor on 01494 725 353 if you would like to discuss a transfer.
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