The Pound is enjoying a further boost against all currencies reaching fresh highs on many currencies as a transitional deal is struck on Brexit and the Bank of England become more likely to raise rates in May and possibly further ahead.
There is a possibility that the Pound will continue to rise even further but this will largely hinge on some strong economic data which will validate the recent improved high expectations on interest rates. The BoE (Bank of England) has linked raising interest rates to Inflation figures and improving wages, this makes the latest figures for Inflation, Tuesday 17th and Unemployment Wednesday 18th, very important.
I think the danger now is that the Pound struggles to keep up the pace with the very high expectations that have been set and it could gently drift lower in the absence of any new news to really spark interest.
That is not to say the Pound wont rise, we have some of the best conditions for Sterling in almost a year. I just mean that much of the good news is already factored in so this means to see a move significantly higher will require much better than expected news.
It is also important to note that the end of March saw the busiest week for the Pound all year with both the EU Summit and also the Bank of England interest rate decision. The next BoE decision is in May and there are ongoing Brexit talks but nothing concrete expected to be learned in April.
Sterling should continue to benefit from the progress on Brexit and support lent from the highly likely May interest rate hike but overall I cannot see anything to warrant expecting any further dramatic increases.
Clients buying a foreign currency with the Pound might be tempted to hold on hoping news from the BoE will see their rate improve dramatically could be in for a shock. Last time the BoE raised interest rates the Pound dropped!
Despite the overall more positive outlook it would seem locking in levels on any spikes is the sensible way forward to avoid the risk of losing out on the improvements. The progress on Brexit is most welcome but the final deal is a very long way off and until we get the final clarity Sterling rates seem likely to remain lower.
March saw 3 ½ cents of movement on GBPEUR as both the ECB and the Bank of England hinted at further tightening of monetary policy. The Euro strengthened to some of the best rates against Sterling all year before the Pound returned the favour at the end of March.
One of the biggest headaches for Euro buyers is the strength of the Euro which is performing at multi-year highs against most currencies over the course of the last few months. Continued political uncertainty in the UK from Brexit and volatility from Donald Trumps behaviour has all increased the Euro‘s appeal to some investors. Economically too the Eurozone is outperforming its peers, with strong growth in 2017, growing at 2.7% versus the UKs 1.5% in 2017.
One of the biggest events in April for the Euro will be ECB interest rate decision on the 26th. This could easily see the Euro stronger if the ECB gives further news relating to ending their current QE (Quantitative Easing) program and potentially hinting at future interest rate hikes in 2019.
This news in March saw GBPEUR drop to the lowest point of 2018, the current improved sentiments for the Pound had already started to fade towards the end of March so Euro buyers with Pounds hoping for even better levels do not have too much time to play with.
“One of the biggest events in April for the Euro will be ECB interest rate decision on April 26th. “
The most important dates of economic data are Unemployment data (4th April) and then Inflation data (18th). The ECB have linked their moves to economic developments here, it could be argued that much of the news is ‘priced in meaning any deviation might unsettle the Euro.
What could also weaken the Euro are the on-going Italian and Spanish political situations. With both scenarios we could be looking at further elections to end the current stalemates. So far neither issue has dramatically weakened the Euro but it doesnt inspire too much confidence for the future.
Just like the prospect of the UK raising interest rates is seeing the Pound higher, a possible rise from the ECB is helping the Euro. With key UK data due on the 17th and 18th April the middle of the month could see some volatility on GBPEUR rates.
I correctly forecast a range of 1.11-1.15 in March with the EU Summit presenting a better opportunity to buy Euros with Pounds. I think this range will remain in place in April too. There is the possibility GBPEUR moves above 1.15 should any economic news for the UK come in much better than expected but so long as Eurozone data keeps their outlook positive too, this will be countered.
With a significant move higher for Sterling likely to be confined to when a final deal on Brexit is reached by the Autumn, clients buying Euros with Pounds within a shorter timescale should find comfort in buying at the higher ranges of the last 11 months.
When is the best time to buy US Dollars?
We ended March and began April at close to some of the best rates to buy US Dollars with Pounds since the Referendum vote. A buoyant Pound and some uncertainty over the pace of US interest rate rises has helped the GBPUSD rate to drive higher in 2018.
There is uncertainty over the future outcome from ‘Trade Wars and Trumps tariff plans which might weaken economic growth and also create fresh uncertainty over the scheduled interest rate rises.
A big factor in the strength of a currency is the interest rate which will influence demand. With an interest rate now of 1.75% the US Dollar is a more attractive currency to hold, however the market was being led to believe the pace of these hikes would be faster and higher. This scaling back in expectations has seen the currency weaker and it is these sentiments which I believe will be the prime mover of GBPUSD rates in April.
The first major release is the Non-Farm Payroll and Unemployment data on 6th April. Improvements in the labour market help the US Federal Reserve to take a view on how warranted interest rate hikes are. GBPUSD has been comfortably above 1.40 but could easily dip down if this data comes out much better than expected.
The Non-Farm Payroll data is usually a very volatile release and any clients considering a GBPUSD exchange in the early part of April should be ensuring they are tracking exchange rates ahead of this news.
I expected GBPUSD to trade in a 1.35-1.45 range for March and so it was as we moved 1.37 – 1.42. I cannot see anything massively different in April, the Pound has improved on the back of the Brexit progress and increased UK interest rate hike expectations. This should prevent any sharp drop.
“Overall the improvements the Pound has made should hold in April with GBPUSD remaining more above 1.40 then below.”
The lack of any firm final deal though (which is unlikely until Autumn or year-end) will prevent any major moves. Some commentators are targeting 1.50 in their assessments which might well be realistic in the summer months if the Pound keeps gently making progress and concerns over US rates hikes are amplified. 1.37-1.44 seems a likely range for April to me.
As a safe haven currency the US Dollar can strengthen in times of economic uncertainty so we might well see some news which indicates a stronger US Dollar. Examples in the last 6 months would include the stock market ‘correction in February and also the threat of nuclear war with North Korea.
Overall the improvements the Pound has made should hold in April with GBPUSD remaining more above 1.40 then below. With the good news very much priced in however, we will need to see something fairly dramatic to see us breaking out of the ranges we have so far occupied in 2018.
I correctly forecast GBPAUD remaining at the higher levels and breaking above 1.80 in March, this level has so far held and it is difficult to see any move back lower at this stage. April kicks off with the most important Australian release, that of the RBA (Reserve Bank of Australia) interest rate decision.
The RBA has been fairly neutral in their recent decisions undoing the progress that we had seen towards the end of 2017 when the market believed we would see some interest rate hikes. The RBA has pushed these expectations right back, probably into 2019, but there could be surprises.
A major factor that has contributed to the AUD weakening is the strength of the US Dollar. As the biggest currency pair connected to the Aussie, as the US Dollar rises and falls we can see big shifts on USDAUD which will ‘weigh or lighten the Australian Dollar against other currencies.
This trend has been exacerbated lately by the US raising their interest rate to a higher level than in Australia, with America at 1.75% versus the Australian 1.5%. One major appeal of the Australian currency has been its high interest rate which has attracted investment where other currencies had very low returns.
As many leading economies are now raising rates the argument to hold AUD diminishes as investors can get a better return elsewhere. This trend is well known as a reason that GBPAUD has been changing and it seems likely to continue in April. Whilst GBPAUD probably wont hit 1.90 a move towards it cannot be ruled out.
“It looks like the market will continue to favour those buying Australian Dollar with Pounds over those selling Australian Dollars.”
This currency pair can be very volatile so it is well worth keeping your account manager at Foreign Currency Direct aware of any targets or transfers which might influence your exchange rate.
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