The pound enters July in a weaker position, with the interbank exchange rate down since the start of June at the time of writing against both the euro and the US dollar. This is largely due to the long term uncertainty caused by the Brexit vote, and the lack of clarity over the UKs future relationship with the EU.
July could provide further evidence over what type of Brexit we can expect, with the Conservative leadership campaign due to be completed by the 22nd July. The frontrunner Boris Johnson has not ruled out pursuing a no-deal exit for the 31st October, and this could see the pound weaken. It could also be argued that much of the pounds weaker performance in May and June is due to this potential negative outcome already being priced in.
Boris Johnson is leading the pack in the race to becoming the UKs new PM. Whilst recent surveys entering July suggest his popularity may have waned, he still looks the favourite. Sterling had dipped following comments made by Johnson that he had ruled out any extension to the 31st October deadline. This is a prime example of the strong link between potential Brexit outcomes and sterlings performance.
It appears that 22nd July is key, as this is when the Conservative membership will vote on who will be the next PM. So far, the markets perception of a Boris Johnson or Jeremy Hunt premiership. When we learn the final results of this vote this could also result in movement for the pound as the markets adjust accordingly.
The start of the month is usually busy on the data front with the latest, Purchasing Managers Index (PMI) surveys on the 1st – 3rd, including the latest Manufacturing, Construction and Services data. This is snapshot of the direction of economic trends in manufacturing, based on a survey taken by supply chain managers across 19 different industries. the monthly changes in purchasing managers sentiments on their businesses, which can be a market mover for the pound.
On Wednesday July 10th we will see the latest Industrial and Manufacturing Production data, UK Gross Domestic Product (GDP) data, and well as the latest National Institute of Economic & Social Research (NIESR) GDP estimate too. Tuesday 16th is the latest Unemployment data, followed by inflation on the 17th, then on the 19th we have the latest UK Government borrowing data. These releases are generally being seen in the light of Brexit and how it may influence the Bank of England (BoE) in any future monetary policy decisions, which again could be important for the pound.
July seems to have the potential to be busier towards the end of the month, with the Conservative leadership election on the 22nd. The market appears to be pricing in the increased chance of a no-deal Brexit, hence the pound having lost ground in June and May. The results of the leadership contest will help provide more information for the market to make a judgement on the value of sterling.
The end of the month might also be busy with the latest Bank of England interest rate decision on August 1st, Sterling may therefore be extra sensitive to the data released in July, as it could influence the Bank of Englands decision.
June saw the euro losing ground as Mario Draghi, the President of the European Central Bank (ECB) raised the prospect of extending the Quantitative Easing program, also known as QE. This saw the euro weaken since by nature, QE increases the supply of money and generally reduces the overall value of the currency concerned.
Julys economic data will likely be scrutinized for signs that the QE is necessary, and speeches delivered by various ECB members will also be closely monitored for comments relating to this prospect. With Inflation low and growth meagre in the face of a slowing global economy, increased pressure on the ECB to act would probably see the euro weaker.
Mario Draghi is widely credited for saving the euro, when in July 2012 he announced that he would do ‘whatever it takes to shore up confidence in the euro during the Eurozone debt crisis. This confidence has underpinned a strength, relative to the weakness at that time, which has largely held since then. Draghi also helped spearhead and deliver the QE program in 2015. Whilst this weakened the euro, it helped restore confidence and is credited with helping avoid a worse growth and deflation crisis.
The latest assessments, however, are that the economic problems within the EU are far from resolved and may well rear their head again, thereby warranting further stimulus. This is more concerning with Draghi stepping down in October. July may well see the market beginning to take his pending departure into consideration, as he might have plans in place to finish his last stint as Governor with some action. Italys debt budget concerns are ongoing, and their prevalence in July is unlikely to inspire too much confidence for the euro.
The ECBs Interest rate decision and Press Conference on the 25th July are likely to be a highlight with the market, considering its sensitivity to comments regarding possible changes in monetary policy. It is worth pointing out that at the beginning of the year, the currency market was pricing in possible interest rate hikes by the ECB for 2019. Reversing that expectation, and introducing the idea of further QE and perhaps even further interest rate cuts highlights the lack of certainty in policy by the ECB, a key feature in providing confidence in the currency.
The beginning of July sees the release of Unemployment data on the 1st, and Retail Sales on the 4th. This data is also likely to have an impact on future monetary policy decisions from the ECB, and therefore the euro.
The euro may come under pressure if investors feel that the ECB is gearing up to revisit the QE program which was only finalized in December 2018. Such a reversal of outlook reflects the increasingly uncertain nature of the global economy, with Trumps trade wars being blamed for slowing global growth and weighing on demand for European exports.
The euro could face some tough questions in July, particularly as Mario Draghi, who has been such an important figurehead for confidence in the Eurozone, is now only 3 months away from departure. It is possible the market may become nervous regarding the suitability of future candidates to provide the same reassurances he has, which is yet another hurdle for the single currency to clear ahead.
2019 has been a year of reversals for Central Banks, with the European Central Bank (ECB), The Reserve Bank of Australia (RBA) and US Federal Reserve (Fed), contemplating or pursuing interest rate cuts. All 3 of these were discussing interest rate hikes towards the beginning of 2019, which shows just how quickly sentiment can change in the currency market. The July 31st meeting for the US Fed sees a key topic of conversation due, with an expectation that rates might be cut.
The G20 Summit, which is taking place in the final days of June, could also see volatility on the US dollar as the market will have to take stock of the escalating trade wars. The global element with the US dollar will also persist, as ongoing concerns over Iran continue to create fears over world order. Due to the global nature of the US dollar, and its status as a safe-haven currency, July could be a volatile month for the currency.
In times of global uncertainty, whether it be economic or political factors, the US currency will often appreciate. This ‘safe haven status is a key element for the US currency, particularly with the concerns surrounding Iran and the concerns of a global economic slowdown caused by the trade war between the US and China. Whilst the US currency might well lose some value if the US Federal Reserve cuts interest rates and investors believe the trade wars will weigh more heavily on the US economy, the attraction of the US dollar as a ‘shield against uncertainty elsewhere could become an increasingly important factor.
On the domestic front, there is plenty to move the market starting with Friday 5th Non-Farm Payroll (NFPR) data and Unemployment data, which has proven to be a cause of potential movement in the dollar. The US Federal Reserve have used this data in their assessments of whether to consider interest rate changes. The following Friday on the 12th is US Inflation data which is also important for the very same reasons, lower inflation is a concern that might be alleviated through the lowering of interest rates.
A lower interest rate has historically seen currencies fall in value, but this is not guaranteed and the US dollar can behave slightly differently to other currencies. Signs the US will cut rates could signal wider concerns in the global economy, which might cause investors to buy the US dollar, in anticipation of worse bad news ahead. On July 26th well see US Gross Domestic Product (GDP) data, another key element for the Fed to consider and then Wednesday 31st is the actual interest rate decision.
July is shaping up to be a busy time for the US currency, with the fallout from the G20 Summit and the ongoing prospect of trade wars, and potential escalation. Continued concerns over Iran and fears of a global economic slowdown present a paradox for the US currency with the potential for it to weaken, yet also strengthen as investors eek the safety of the currency. With the potential for such events to quickly change, the possibility for increased volatility on the US currency develops, leading to what could be an important month for the US dollar.
The Australian dollar gained some ground towards the end of June, following renewed speculation that a trade deal could be reached between China and the US. China is Australias largest export market, and this can present volatility on the currency, where market sentiment rises and falls on the possibility of a trade deal being struck or not.
At home, Australia is facing questions over its interest rates with Inflation hitting a 16-year low earlier this year. The currency could be in for more turbulence as investor debate the likelihood of further cuts, which many in the currency markets now believe is a case of when, not if. July looks to be an interesting month for the Australian dollar as the currency markets debate the wider implications and outlook for the trade wars, against the rising domestic concerns and possible need for interest rate cuts.
July kicks off quite with the latest interest rate decision on Tuesday 2nd July, with the market eager to see if there will be any further cuts below the historic low of 1.25%. Interest rate decisions and the following meeting minutes are often important affairs for any currency, particularly when there is an expectation of a cut or hike, since the market will often have to make a quick readjustment on where it thinks interest rates might be headed.
The early part of the month is also important with Retail Sales released on Friday 5th, before Wednesday 10th with Chinese Inflation data and then Monday 15th Chinese GDP data. As mentioned, Chinese data is an important influencer for the markets sentiment on global trade. We would usually expect strong Chinese data to have a positive impact on the Aussie dollar and vice versa. The Australian dollar is used as a barometer of global trade, rising and falling as investors feel positive or negative about the global outlook.
Other news will be the Tuesday 16th RBA Meeting Minutes, Unemployment on the 18th followed by Inflation for Australia on the 31st, any comments from the RBA on the 1st will likely shape the markets view of these releases. These data sets will be measured against the commentary from the RBA and potentially viewed in relation how the RBAs decision is likely to be impacted.
The Australian dollar has been weaker in 2019 but is slightly stronger with the increasing belief of trade wars being not resolved, but with a trade agreement between China and the US a possibility. The G20 Summit could be, it is expected that comments from both Trump and Xi could sway Australian dollar rates by making it a more or less attractive currency to hold, depending on how the summit has progressed.
Understanding the next steps on Australian interest rates is likely to be key to providing the market with some news, there is a real possibility signs of further cuts could affect the Australian dollar in July.
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.
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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