Thursday saw no surprise that the Bank of England decided not to raise interest rates, with current market conditions left largely un-altered since their previous decision to keep rates on hold. The real surprise, however, came in the press conference following the announcement with Bank of England Governor Mark Carney leaving the financial world dumbfounded and Sterling seriously on the back-foot.
He reversed his previous position that a rate hike may occur in early 2016 and now believes that no such interest rate rise will be addressed until 2017. He has now been dubbed the ‘unreliable boyfriend’ by lying to markets about when he will be willing to commit to anything substantial. Sterling will now be set for a tough November as investors look to sell off their Sterling in search of better short-term gains elsewhere.
For the fourth consecutive month Sterling has dropped in value dramatically during ‘Super Thursday’ – the first Thursday of each month where the Bank of England announce their interest rate decision for the UK economy, as well as a press conference to discuss their monetary policy statement moving forward.
Since the 2007/8 financial crisis, the most important determinant for a currency’s value has arguably been the timescale for when interest rates would finally rise from these historic and bottomed-out lows.
In this instance, as the above details, Governor Mark Carney removed much of the uncertainty over what may happen in the next few months, but not in the way markets and Sterling holders had hoped.
Instead of giving us a firm month for a rise in interest rates, which would have given the Pound a parallel boost, he took a rate hike completely off the table for 2016. He cited continuation for record low inflation as the main reason why the BoE’s hands will be tied next year.
As an example, Sterling has already weakened by more than 2 cents against the Euro in the two hour period following the announcement. This trend will likely continue as investors and companies change their long-term strategies with the knowledge that their assets will be accruing greater value in alternative countries where the interest rate is above 0.5%.
Carney hinted that he expected inflation to get worse for the UK economy, confirmation of this with inflation data for the UK economy to be released this month will likely spell further Sterling weakness.
That being said, the rest of the economy is performing well relative to its global counterparts. The slide on poor manufacturing and construction data finally stopped as of October, and we have one of the lowest unemployment rates in the world.
Sterling will have opportunities to shine next month, and it is the job of your broker here to highlight opportunities for you this month to take advantage of any peaks in your favour. But you should note that there is more risk than opportunity in the markets following this sudden and surprising announcement.
As a result I believe that the current market presents some excellent opportunities to use Sterling as a buying currency compared to where we may be next month. So, if you need to buy Euros, Dollars or any other of the major currency speak with one of our experienced team of currency brokers today on 01494 725353.
The Euro had a difficult end to the month after first rallying to the highest levels against the Pound since February this year.
Firstly, the announcement that the quantitative easing programme would likely be extended beyond the original September 2016 deadline caused confidence in the Euro to fall significantly.
Secondly, the start of this month also revealed that the scandal over at Volkswagen had effectively doubled as petrol powered cars are being recalled alongside the original diesel. €3bn Euros have been wiped off the value of the European stock-market, and the mass sell-off of Euros benefitted Euro buyers significantly as the single currency became significantly cheaper.
Unfortunately for Euro buyers both of the above boosts in your favour are a short-term gift rather than the promise of a long-term trend. The Volkswagen scandal only caused Euro weakness over a matter of days previously, and it’s unlikely to harm European exports as automobile sales actually rose by more than 6% last month. It seems like Italian companies such as Fiat are picking up the slack.
The Eurozone’s performance recently was also surprisingly good. Inflation is better there across than Channel than here in the UK, and employment rose last month as well as GDP growth forecasts.
I strongly believe the Euro will be moving back towards the highs of a few weeks ago against Sterling, with markets already breaking back into the 1.3’s on Thursday afternoon. A massive boon to Euro sellers who saw rates move against their favour by almost 10 cents in a few weeks, and call to action for Euro buyers that moving sooner rather than later this month could save you a significant sum.
The US Dollar is going from strength to strength. In October Janet Yellen, the head of the FED gave the markets near certainty that a rate hike may occur by the end of 2015.
On Wednesday she gave greater trust to her statement by highlighting that the U.S. Banks were the healthiest they have been since the 2007/2008 financial crisis.
While she mentioned that they still needed to raise a ‘minor’ $120bn to meet liquidity requirements, her comforting words about the new and more robust nature of the US banking system gave markets confidence that they could handle the capital obligations required when credit becomes more expensive as a result of a rate hike.
US Dollar buyers should be looking to move as soon as possible, as there is a greater likelihood that the USD will continue to gain greater expense as the announcement draws near.
The Australian Dollar has proved its resilience in the face of slowing demand in China. The Australian economy has continued to post positive figures in employment and exports, and this has allowed the RBA to avoid any cuts in interest rates which were previously understood to a necessary move.
The news that the UK’s interest rate decision won’t be seriously revisited until 2017 has made the Australian Dollar ever more enticing to investors. By keeping rates on hold the foreseeable future will still see the interest rates in Australia at 2%, compared to a mere 0.5% in the UK economy. Investors will look to hold AUD for better short term gains, and demand will drive up the Aussie’s value against the Pound.
Again, due to this revelation of a difficult 2016 ahead for Sterling, moving sooner rather than later appears to be the most effective course of action to maximise your Australian Dollar return.
To be kept informed of all the latest currency news and the options available please call our trading floor on 00 44 1494 725353.
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