March was the final month to prove that what Sterling has been experiencing since January was a trend that was likely to continue, rather than a bump in the road for Euro and Dollar buyers alike. Yet last week Sterling has started to show some signs of life, the Pound has refreshingly recorded three Cent gains against the Euro and the US Dollar.
Whilst this positive movement has mainly been down to some good news on inflation for the UK (after seven months of concern) currency exchange rates are still being governed mostly by politics with economics taking a back-seat for once.
The main headline to push the upcoming EU Referendum to page-two in the national papers has been the scandal erupting out of Panama. This interesting shake-up to what has been pretty monotone coverage of the potential Brexit has contributed to these recent opportunities emerging, and foreign currency buyers may see more crop-up in the short-term.
The ‘Panama Papers’ has been eye-catching, dramatic, and deeply concerning for the world to see. Normally, this scandal would only cause the value of a currency to change if a country’s leader, or any major financial institutions were implicated.
There may still be time for UK Banks to come under scrutiny, with HSBC already on the back-foot with some accusations of assisting their clients to hide money over there, but it is David Cameron who has truly been feeling the heat.
He is by no means about to lose his job, unless some new evidence emerges about foul play, but his credibility has taken a major hit. With Cameron commanding the spotlight in the Remain campaign’s task to keep the UK firmly within the EU’s ranks, financial markets are becoming nervous over whether he will be up to the job, which is translating into diminished confidence in the Pound across the board.
Luckily this scandal has coincided with promising inflation data and retail sales figures for the UK, a result of an early Easter increasing spending activity, which has been the main driver for the sudden recovery in the Pound.
Economic information will be scarcer for the second half of the month, meaning a greater sway on the Pound’s value will come from the political arena.
With the above in mind, and with the official campaigns for ‘Vote Leave’ and ‘Britain Stronger in Europe’ beginning in earnest last week, then the mass Pound sell offs from a spooked market which characterised the latter half of March may be repeated in the coming weeks.
The average loss for Sterling between the middle of March and the first week of April was 3.1% against the Euro, the US Dollar, and the Australian Dollar.
Anyone considering using Sterling to buy a foreign currency may be wise to consider their options in buying their currency ahead of time or ‘fixing’ exchange rates, otherwise you will have to rely on a major event outside of the UK to make your destination currency a cheaper prospect.
It will certainly be difficult to outweigh a potential Brexit, the Pound is under similar pressures the Euro faced last year with the sudden possibility of a ‘Grexit’ sparking panic in the market place. If this is anything to go by, I would be surprised to see the Pound in a stronger position before June 23rd.
There is a reason that the Pound dropped the most against the Euro last month than any other major currency, with just under 5% losses across 3 weeks compared to a more gradual 2.1% and 2.5% for the US Dollar and Australian Dollar respectively. The Eurozone is accelerating its growth, and there is no other major economy in the world which can say the same.
Demand for the Euro has rarely been higher. The Eurozone has had more foreign investment in the first three months of this year than it had during the entire year of 2015.
These foreign companies and individuals require Euros to invest, which has now totalled €215bn – an easy explanation why the Euro has been the outstanding performer this month in the currency world.
In truth, the European Central Bank do not want the Euro to be this expensive. Their growth policy has been based on a cheap Euro to fuel their export sector, and have intervened regularly to realise this whenever the Euro became too expensive.
However, they cannot simply press a button. They have limited tools which include cutting interest rates and talking down recent economic performance at press conferences in order to make the current light around the Eurozone a little duller.
In March, however, they ran out of options. Mario Draghi, the head of the European Central Bank, announced that he would be cutting interest rates to 0%, but categorically denied that the Eurozone would ever entertain the idea of negative interest rates.
With limited room for manoeuvre, Draghi may have to see the Euro’s value run away from him. The Eurozone grew at 0.3% last month which matched the UK, and with its own improvements in inflation, Euro buyers may have to grapple with the difficult reality that interbank levels below 1.20 could be a reality very soon.
The US Dollar had an interesting March which showed massive currency movements, but always within the 1.40-1.45 trading band on GBP/USD. If any exchange rates could be called a roller-coaster last month, it was here.
Along with Sterling’s positive and negative movements, the value of the US Dollar has also been largely temperamental. This is not to do with Donald Trump’s attention-grabbing policy announcements, but the evolving discussion on interest rates.
The US were initially set for a target of 4 incremental interest rate hikes this year, yet slowing global growth and the US’s own issues with inflation has added more risk to the pile when making such an important decision. Now the expectation is for two-hikes, and even this may be ambitious.
The first interest rate rise was the initial impetus for the drastic moves towards the lower 1.40’s, and a second could well break below 1.40 once more for a more sustained period of time. But March’s meeting of the FED seemed to put this on the back-burner, and it is forecasted that US Dollar sellers will have to wait until June for the next opportunity for the Dollar to gain from a decision to hike rates.
In the meantime, it seems that Dollar buyers will continue to enjoy opportunities north of 1.40. While still historically low, many have unfortunately experienced from last month that this can be worse.
The shoe is now well and truly on the other foot. The Australian Dollar has had a similar run of fortune to the Pound last August. A combination of factors has forced this sudden U-turn.
The commodity markets seem to have bottomed-out, so whilst low, investors seem confident that there is only really room for improvement at this point. A few breaths of life have been seen in the oil industry, though they still struggle to continue beyond a week or so.
China has stabilised after a tumultuous beginning to the year. Huge volumes of investment from the state has flattened out losses on growth and Chinese demand for Australian exports has improved.
Economically Australia has also benefitted from a near record tourist season, but politically the picture is slightly more worrying.
Malcolm Turnbull may be calling an early election due to lack of support over his labour reforms, and with the current polls putting his coalition behind, some of the uncertainty that Australia has managed to shake off over the past few months may return in full force.
With an evolving political situation, it would be prudent for anyone with an Australian Dollar buying requirement, whether selling or purchasing, to be in direct contact with your personal broker here to be kept abreast of the current situation should any opportunities arise even in this falling market.
To keep track of current exchange rates visit our live foreign exchange rates page. Alternatively you can call our currency brokers on 0044 1494 725353.
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