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Whether you are buying Euros, US Dollars or even Australian Dollars, a number of political and economic events could shape exchange rates moving forward.

For the second time in a decade, the FED’s decision to raise interest rates has sparked fresh hopes for the US economy. With unemployment rates below 5% and inflation edging closer to the FED’s 2% target, markets have been certain since the result of the Presidential election that one was imminent. It came as no surprise last week, given that markets had already priced in a hike at almost 100% certainty, but the real excitement for US Dollar bulls now sits in 2017, when the FED announced 3 further hikes are to be expected.

This news could have profound implications for anyone with an upcoming transfer and the below article will address some of these key points in detail. Whether it’s the Euro, US Dollar or Australian Dollar, the prospect of a stronger US economy and subsequent interest rate hikes that follow could make for significant changes to current rates of exchange.

Pound to Euro exchange rates

The relationship between the US Dollar and Euro is quite profound. As the world’s most traded currency pair, when one strengthens the other tends to contract. Pound to Euro exchange rates peaked by half a cent following the FED’s announcement, and the currency pair are now edging closer to the 1.20 barrier. Whilst the correlation between the US Dollar and Euro are well observed, this should not be assumed to equate to GBP/EUR strength by any means.

The GBP/EUR exchange rate fell as low as 1.1234

The Pound remains under significant pressure following the Brexit vote in June, with the real threat to the economy set to unravel once the Government provide their official notice of withdrawing from the EU. These spikes in Sterling’s favour provide some opportunities at best, but the Pound’s current negative sentiment does not allow for long term strength against its Euro counterpart.

That being said, the rise of Brexit and Trump is dampening the Euros sentiment ahead of the European elections next year. Furthermore, the recent Italian Referendum provides some clues as to what headaches the Eurozone faces in 2017.

Whilst Brexit is likely to be a huge player behind Pound to Euro exchange rates, there are arguments for, and against supporting GBP/EUR strength in the months ahead.

For one, the type of Brexit deal the UK plans to achieve could have repercussions for both the Pound and Euro. The rise of Trump makes for interesting talks on UK-US trade and not least, the potential for further EU members to leave the single market.

As it stands, investors appear to favour the Pound over the Euro, with EUR/USD exchange rates at historic lows and GBP/EUR close to their highest levels since June, it would appear that the woes of Brexit are not at the forefront of investor decisions. This perception amongst markets could be set to change in March, when Parliament are expected to invoke Article 50 – starting the process of the UK-EU divorce.


Pound to US Dollar exchange rates

Since the FED announced a .25% rate hike, Pound to US Dollar exchange rates have dropped nearly 3 cents and remain under pressure. The currency pair has suffered a huge fall since the Brexit vote, with rates hitting a historic 30-year low since June. Given that markets had already priced in a rate hike in December, these swings in Pound to US Dollar exchange rates are prominent in predicting future rate hikes next year, and could spell further bad news for those looking to buy the US Dollar with Sterling.

With a strengthening, US economy coupled with an unpredictable, untenable Brexit stance, the US Dollar will continue to weigh heavily on the Pound’s position in 2017, without even factoring in the potential for three US rate hikes. Again however, much of this depends on a number of factors not least, the unpredictability of a Trump Presidency.

Last year when the FED promised as many as four rate hikes in 2016, concerns for the Chinese economy prevented the FED from moving ahead with their plans. This followed the unexpected Brexit vote in June and the build up to the US elections in November. 

US Dollar strength continues

We’ve seen before how reluctant the FED are to act during uncertain Global conditions, and next year will have its own host of Global economic woes.

Similar to the Brexit vote, it’s yet to be seen what impact a Trump Presidency will have on the US economy. His campaign promises of imposing huge tariffs on Chinese imports has already upset Chinese officials, made worse by his decision to set up business arrangements with Taiwan. If Trump’s plans go ahead, the Chinese economy could suffer at the hands of huge US import tariffs. But of all the campaign promises made, his pledge to rip up the transatlantic trade agreement on day one will stall any hopes of a US-EU free trade agreement. It remains to be seen as to whether the FED will raise interest rates again in 2017, but if the new year is anything like the last, the FED will err on the side of caution.

Pound to Australian Dollar exchange rates

With US interest rates now at 0.75% compared against the Australian interest rate of 1.5%, the US Dollar has become a far more attractive for longer term investment. When you consider that 3 further US hikes are too be expected in 2017, the US interest rate could supersede that of the Aussie Dollar. As witnessed by their latest GDP figures for Q3, the Aussie Dollar’s overvalued currency is crippling the countries key exports, which fell 1% in the month of October.

Will the AUD's downward trend continue?

The RBA may have some tough decisions to make in the new year, which could result in further interest rate cuts for the nation. But it isn’t just an overvalued AUD that is hurting growth, history tells us that a strong US Dollar tends to weaken the price of commodities, presenting a double-edged sword for the RBA.

It’s easy to assume that the Australian Dollar, at the feet of the US Dollar, could be in for a bumpy ride next year. Much of these factors hinge on the US Dollar, its economy and whether the President-elect Trump can make a success of his loosened fiscal policy.

With the FED maintaining their hawkish stance towards longer term interest rates, concerns within the Australian economy may be enough to prevent their much promised 3 rate hikes from emerging.

Protecting your exchange rate position ahead of a volatile year

If there’s anything the markets have learnt from 2016, unpredictability is expected to continue into 2017 with the European elections, Trump and Brexit still at play. Adding in concerns for the Australian economy and Italian bank bailouts and we have quite a recipe for market volatility, clients who are looking to trade in the coming weeks should be aware of the huge weight the Global economy carries in the new year. With this in mind, clients may be prudent in taking the steps to mitigate risk during periods of volatility, the use of a forward contract may be appropriate.

A forward contract from Foreign Currency Direct allows you to lock in current rates of exchange for a small deposit. In the event the market moves against you, you have peace of mind knowing that you do not have to pay more for the same amount of currency. This is a great option for those who want to buy within the next 18 months, but may not have all of the funds available at the time.

If timing is less crucial, a limit order may be a good option for those who have a target rate of exchange in mind. We will automatically purchase your currency once your target rate of exchange is reached.

Exchange rates do not tend to move in a straight line and as such, considering the contract options available to you, mitigating risk to your currency requirement could save you thousands on a transfer.

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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