Sterling may enter August in a slightly stronger position than it finished in July. At the time of writing GBP moved higher following Boris Johnsons appointment as the new British Prime Minister. Sterling has proved sensitive to the outlook on Brexit, with signs that the UK could be headed for no-deal leaving sterling lower, and signs
of a future deal to be struck providing more optimism. The start of August also sees the latest news from the Bank of England (BoE), with the market closely monitoring commentary surrounding the prospect of future interest rate cuts.
The beginning of August may be a slightly more volatile time than usual for the pound, with the Bank of Englands interest rate decision on the 1st August. It was reported by the National Institute of Economic and Social Research (NIESR) at the end of July that there was 25% chance the UK was already in a recession. Based on this increasingly pessimistic view of the UK economy ahead, in July the Financial Times reported a 40% chance that the Bank of England would cut interest rates before the end of the year.
The raising and lowering of interest rates will historically influence the currency concerned, typically a higher rate makes a currency stronger and more attractive to hold, whilst a lower rate makes it less attractive and weaker. The expectation of a possible rate cut ahead from the Bank of England will therefore be dealt some evidence at this latest meeting. The Bank of Englands chief economist Andy Haldane did state that he personally would ‘be very cautious about considering a monetary policy loosening, barring some sharp economic downturn.
The interest rate decision and additional commentary from the Bank of England will be a point of interest for sterling, as will future economic data releases throughout the month of August. Other dates in August to monitor will be Friday 9th UK Gross Domestic Product (GDP) data, Manufacturing and Industrial Production data and the NIESR GDP estimate. Tuesday 13th is when Unemployment data is due, followed by Retail Sales on the 15th, and the latest UK Government borrowing data on Wednesday 21st.
The outlook on Brexit will continue to be a topic of discussion, as we approach the 31st October extension deadline. With the UK parliament due to be on recess until the start of September, there may not be too much time for serious parliamentary business. It seems we can expect the topic of Brexit to remain in the headlines with any fresh developments providing the potential for movement on the pound, as it has done since before and after the Referendum vote.
Economic news has the potential to be of more importance in August with the Bank of England meeting. We might also wish to watch for any high-profile speeches by Boris Johnson as he has for the last few years proved an ability to move the currency markets with his comments.
The euro is finishing July with mounting speculation over interest rate cuts and potentially more Quantitative Easing (QE) ahead for the Eurozone. QE is the purchase of certain assets by a Central Bank, in an attempt to kickstart the economy by increasing the money supply. The euro had initially lost value on this proposition, since such measures will typically weaken the currency concerned. However, on the 25th July ((ECB) meeting, when signalling policy ahead and refraining from actually making any cuts the euro did retrace some of the losses that had been made in the lead up to the event.
August will contain new economic news which will be used by both the ECB and the market to assess the next policy decision from the ECB at the September meeting. Immediate reports in the business press following the ECB decision suggested that September could be the time for a change in policy. August may well bring some uncertainty and movement on the euro, as investors try to second guess what lies ahead.
Retail Sales data for the Eurozone is due Friday 2nd August, with Unemployment data, (GDP) and Employment change all due on the 14th. Some of the key reasons for the ECB to be embarking on this new path are concerns over a slowing economy and a possible recession risk ahead. Lower growth has been seen in the Eurozone, with German manufacturing being reported to be in ‘freefall by the Financial Times at the end of July, as a closely watched business survey dropped to a 9-year low. Cutting interest rates and rolling out a QE program can help to stimulate an economy, this is the idea of the ECB policy.
Further news will be seen on Friday 30th with Inflation and Unemployment data. Inflation has been a key topic alongside growth, being monitored by market participants as to an indicator of the health of the Eurozone economy, and the likelihood of future policy action as outlined above. Inflation is the rate at which prices rise; the market has been previously concerned about low inflation in the Eurozone which has been stuck stubbornly below the 2% target the ECB aims for. August will therefore be a month where the market will assess what lies ahead for Eurozone economic policy ahead of the September ECB meeting.
The US dollar has been stronger in recent weeks, reaching fresh 2-year highs against the pound in July. At the time of writing, the market is eagerly awaiting the Federal Reserve (Fed) interest rate decision on 31st July, where investors have been debating the possibility of interest rate. Typically, such a move would weaken the currency concerned but with US interest rate still the highest amongst the worlds leading economies, the US dollar has remained strong.
The Fed decision will have been made by the beginning of August and it seems likely a cut of 0.25% will have taken place, as this is the majority market prediction. What might have proved more interesting is the commentary from the US Central Bank regarding future cuts and how it perceives the current US and global economic outlook. With the Fed appearing to be on the cusp of a change in interest rate policy (from hikes to cuts), and markets historically becoming more reactive when there are changes in economic sentiment and outlooks, there is potential for increased volatility
The start of August is a busy time for the US dollar as we will have had the latest US interest rate decision, plus Friday 2nd is the latest Nonfarm Payroll (NFPR) data and Unemployment data. NFPR is a snapshot of non-agricultural employment changes and is very closely monitored by investors as a sign of the health of the US economy. This is also used by the US Federal Reserve in their decision making, so it will be interesting to reference the decision and commentary of the Fed from the earlier decision, against this new information on the US economy.
Other economic news to monitor will be Inflation data on Tuesday 13th and Retail Sales on the 15th. The US economy has been growing but the pace of growth has slowed from last year, and this slowdown combined with lower inflation figures, has prompted the calls for interest rate cuts. Other events to monitor will be the Federal Reserve interest rate decision meeting minutes on Wednesday 21st, plus Thursday 29th (GDP) data on Thursday 29th.
Previous concerns in the currency market that the US dollar and economy had peaked saw the US dollar sold off, only to regain ground as it appeared that any slowdown in the US would also affect the rest of the global economy. ‘Best of a bad bunch is a term often used in the currency market to explain why one currency will outperform others, despite economic theory indicating it might perform badly. Whilst the is US appearing on course to cut interest rates, so too appears the European Central Bank (ECB) and also possibly the UK. The US currency is therefore despite apparent weakness, still performing strongly as it remains the ‘best of a bad bunch.
The Australian dollar enters August in a steady position as the market continues to find some comfort from the fact no immediate interest rate cuts appear forthcoming. Governor Lowe of the (RBA), spoke at the end of July highlighting his commitment to ‘long-term low interest rates. However, by not signalling any more pressing desire to cut, the Australian dollar has been holding its nerve.
With lower interest rates typically weakening the currency concerned, the 2 previous cuts this year by the RBA had initially seen the currency weaker. However, with the RBA ‘standing pat (not looking to raise or lower at present), and with other Central Banks like the ECB and US Federal Reserve (Fed) looking to make cuts, the Aussie has benefitted from the expected lack of movement on the interest rate.
Friday August 2nd sees the latest Australian Retail Sales data, where investors will be monitoring economic news for any signs of health or weakness in the Australian economy. One of the reasons for cutting interest rates successively in June and July was falling inflation and concerns the trade wars with China were negatively impacting growth. One of the reasons a Central Bank cuts interest rates is to try to stimulate economic growth.
In what can be one of the most important releases of the month, Tuesday August 6th is the RBA Interest Rate decision and Rate Statement. As mentioned above, it is widely expected the RBA will not be looking to make any changes in policy but any suggestions to the contrary may see movement on the Australian dollar. Friday 9th is the Monetary Policy Statement and also Chinese Inflation data. Data from China carries weight for the Australian economy and currency, since China is Australias largest trading partner. We also have Unemployment data on Thursday 15th, and then the latest RBA Meeting Minutes on Tuesday 20th.
The Australian dollar can be a volatile currency owing to its relationship to the global economy. Its viewed as a ‘commodity currency, because its economy is so dependent on exports of natural resources like Iron Ore and Aluminium. As sentiments rise and fall on global trade, the Aussie can move higher and lower as the market takes cues from a more or less positive global economic outlook.
Whilst the Australian dollar has been slightly less volatile lately, owing to the current truce on the trade wars between the US and China, plus the neutral position of the RBA on interest rates, any changes in this sentiment may be an influence on the Australian currency in August.
If you are considering a currency transfer, buying a property abroad or looking to bring funds back to the UK from overseas, 2019 has a number of potential events which could create some excellent opportunities for well-prepared buyers and sellers.
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