Whilst government borrowing, inflation and unemployment data all suggest the UK economy could handle a small increase in interest rates, inflation has been gently falling (removing the need to hike) and growth is still troubling. Mix into this the uncertainty over Brexit and the Bank of Englands previous hesitancy, there is plenty scope for an upset and the Pound to slide.
Markets have already priced in this hike and it will be the tone and sentiment of the Bank which could be the biggest market mover here. There is a real possibility of a ‘dovish hike like last November when the hike was accompanied by soft commentary. This saw the Pound drop and I would not be surprised to see this again.
The interest rate decision will be key to shaping any future strength in the early part of the month. At the same time will be the latest Quarterly Inflation Report which will give us some better ideas of how the Bank is viewing future economic growth and inflation levels.
Economic data to monitor The month begins with Purchasing Managers Index data on the 1st, 2nd and 3rd. These releases often impact short term movements, the most important being the Services data on the 3rd.
Thursday 9th August is the latest NIESR (National Institute of Economic and Social Research) GDP data, followed on Friday 10th by the Office of National Statistics data. The ONS is the official government data and tracks the previous calendar quarter, now focusing on April to June. This will be very closely followed since GDP was a key concern for the Bank of England to not raise rates back in May. With the Bank of England linking further hikes to economic performance this will likely be a market mover for the Pound as it provides investors with insight into how the Bank of England may be thinking.
August 15th sees Inflation and Unemployment data, other key factors influencing the Bank of England and the Pound. Retail Sales on the 16th will be one of the last key economic events for Sterling in August, much of the news and movement could come in the first 2 weeks.
Brexit is still the main driver for Sterling, but with MPs on summer recess until September 4th and Trade negotiations not beginning until mid-August, we will be relying on rumour than any key facts to drive rates. The prospect of a very difficult period for the Pound lies ahead after Michel Barnier rejected Mrs Mays customs plans to collect tariffs on behalf of the EU. Theresa Mays own position could be under threat in the Autumn and with such uncertainty looming the Pound might struggle. If the Bank of England fail to spark interest in Sterling early in August, the Pound may remain lower as investors remain confined to the sidelines awaiting something to indicate just what Brexit means.
The Euro begins August on a reasonably firm footing with the ECB (European Central Bank) having recently underscored their commitment to raising rates in 2019. Mario Draghi did, at the recent end of July meeting confirm September 2019 onwards, as a time to be raising their base interest rate.
The Euro is supported by this news and economic data will be very important in August to help investors form a picture of just how likely any hike will be. A recent successful meeting between Trump and Michel Barnier, aimed to thaw the Trade Wars passed successfully and this has also been supportive for the Euro.
Economic news to drive Euro exchange rates The beginning of August will see the Euro driven largely by other global events, owing to a lack of any higher tier data releases. In particular, the US Federal Reserve decision on the 1st August. The rising and falling of the US dollar in connection to this decision, will impact the Euro. EURUSD is the worlds most heavily traded currency pair and shifts on the dollar will ‘drag the Euro lower or higher against other currencies.
The very next day is the UK interest rate decision which will dictate GBPEUR movements and is a very important release for anyone concerned with a Pound to Euro, or Euro to Pound exchange.
Key economic news directly concerning the Euro was released on the 31st July including GDP (Gross Domestic Product), Unemployment and Inflation. All of these are expected to have pointed to consistent economic growth and whilst Unemployment might have picked up marginally, there is nothing to suggest the ECB will not be wildly moving from their current objective to raise rates next year.
Trade Wars could still unsettle the Euro The meeting of Michel Barnier and Trump did little to move the Euro as nothing has been officially agreed but both have pledged to reduce tariffs between each other on non-automotive industrial goods and for the EU to increase purchase of US soybeans. The EU will also increase its purchase of LNG (Liquefied Natural Gas) and both countries will work together to combat intellectual property theft and technology transfers, a direct swipe at China.
This issue could easily flare up once again, we have seen previously Donald Trump saying one thing and doing another. For now, the news has settled the Euro but any escalation of the rhetoric and tensions could weaken the Euro in August.
The Pound to Euro rate looks likely to remain in the lower range of 1.10-1.14 for August. With no clear definitive news on Brexit to really drive any direction, the Bank of England will be the focus. If they disappoint GBPEUR will fall as the Euro is appearing well supported. A hike and positive tone by the Bank of England might see us retest the 1.13-1.14 ranges but with no clear news on Brexit and investors sceptical of the Bank, another tough month for Euro buyers with Pounds seems likely.
The US dollar looks set to remain on the front foot having remained at close to its strongest levels of 2018 against both the Euro and Pound. The key news is the 1st August with the latest Federal Reserve Interest rate decision at 7pm UK time.
Markets expect mentions of a hike for September, particularly following some very positive economic data coming out of the US with recent GDP, Gross Domestic Product data showing 4.1% growth, its best in 4 years. The positivity was underlined by Donald Trump who gave a very positive speech where he said the US economy might double in ten years.
US dollar to be bolstered by rising interest rates and less fears of Trade Wars Aside from the news on the August 1st and analysts will be key to assess the latest NFPR, Non-Farm Payroll data which will provide insight into the US labour market. Overall expectations are positive and the early part of August might see the US dollar slightly firmer. Of course, any signs the Fed will not be raising for September or might be scaling back on the now likely 2 further hikes in 2018, could see the US dollar weaker.
The recent very solid economic growth is not expected to continue at the same pace and with the markets backing the greenback so strongly, any reversal of sentiment would be the big market mover.
Other key dates include Wednesday August 15th with the latest Retail Sales data and Wednesday 29th for US GDP figures. Expectations are for the economic data to continue to show an economy that is performing well.
The Trade Wars have so far failed to dampen the US economy and a recent productive meeting between the EU and Trump has cooled any immediate fears of a worsening Trade War with the EU.
With the Trade Wars not quite living up to the worst fears and the US economy roaring ahead the US dollar could well drive higher in August.
The early part of the month is key with both US and UK interest rate decisions on the 1st and 2nd of the month. With both banks actions largely priced in, we should remain in the 1.30-1.32 range. It might be a case of the dollar rising first and then the Pound clawing back some ground on the Thursday.
Should the Bank of England disappoint we could easily move below 1.30, so long as the sentient from the Fed remains upbeat and positive. A range of 1.28-1.33 should encompass most possibilities but I would generally favour the Dollar against the Pound in August.
The Australian dollar has been rangebound, benefitting from an improvement in the previous negative outlook of the Trade Wars but struggling as it still remains an issue. The mixed sentiment and lack of direction is also confirmed by the neutral expectations from the RBA (Reserve Bank of Australia) who are expected to remain sidelined in the months ahead.
Previous expectations the RBA might hike in 2019 have slipped with Westpac Bank confirming now only around a 50/50 chance. This 50% probability perfectly explains why the Aussie is treading water of late with no major direction.
A stronger US Dollar could weaken the Aussie The early part of August will see some important news from overseas, principally in the form of the latest US Federal Reserve interest rate decision. A generally observed trend has been that a stronger US Dollar weakens the Aussie dollar and vice versa. This is because the USDAUD pairing is one of the most important for the Australian currency. Any big swings on the US dollar will drive movement on the Australian dollar against other currencies too. This relationship is also important as US interest rates, currently at 1.75-2% are much higher than the 1.5% cash rate on offer to investors down under.
Key Australian news is Retail Sales released on the morning of Friday 3rd, with the actual RBA interest rate decision and statement on the 7th. The 9th sees important inflation data with further information from the RBA on rates on Friday the 10th. Thursday 16th see Australian Unemployment another factor for the RBA to track. All in all, the RBA is balancing raising rates to dampen Inflation which has risen to target of 2% against cutting rates to help growth, but which might only further fuel the housing boom.
With wage growth lacking and house prices high, Australian consumers are also highly indebted, so any decision will not come easy. Further expected neutrality will likely see the Aussie continue to operate in the ranges, for GBPAUD the 1.74-1.84 range held for the last 3 months looks likely to remain.
GBPAUD exchange rates have been trapped in a tight range moving only 4 cents between the high and low in July, 1.75-1.79. The expectation is that the Bank of England meeting on the 2nd is the key event with other pieces of data from Australian news unlikely to trigger any major shifts in expectation from the neutral RBA.
GBPAUD will be driven largely by the Bank of England in the beginning of the month and whilst 1.80 could be tested if the Bank of England raise positively, a dovish or ‘soft raise seems more likely which should see the pound lower. All in all, GBPAUD looks to me likely to trade between 1.74-1.8, the lack of Brexit news should only further encourage continuity of the levels we have seen lately.
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