May is perhaps the most exciting month for the Pound so far this year with the eagerly-awaited UK interest rate decision on May 10th.
The speculation over the likelihood of a UK interest rate has been the main driver of volatility on Sterling lately. With the probability of a hike in May being seen at around 50% at the time of writing there is plenty of scope for a volatile month for the Pound as investors try to anticipate what the Bank of England will do.
Economic data is now key, and the start of the new month sees the latest Purchasing Manager Index (PMI) surveys. These data sets have been used by the Bank to form a view on economic strength, the releases that are coming in the first week of May on Manufacturing, Construction and Services could set the pace leading up to the 10th.
Depending on the data I would expect a hike on May 10th although what I think most likely is we might see more of a ‘dovish or soft hike from Threadneedle Street as Mark Carney and his team weigh up the conflicting factors. Such an outcome would match the last interest rate hike in November 2017 where Sterling fell despite the BoE raising the base rate.
A key concern for the BoE in their decision making has been high Inflation and low wage growth but with both these two issues seeming to be undoing themselves of their own accord, the need to hike reduces. The 10th is also the Quarterly Inflation Report (QIR), sometimes dubbed ‘Super Thursday and the fresh commentary on Inflation forecasts by the Bank may well see increased volatility as the market has more information to pore over and help determine future interest rate policy.
Interest rates are a vital factor in the relative strength and weakness of a currency and this news could present some turbulence for the Pound with some very good opportunities on rates, we could see swings of up to 2 cents if the market is wrong-footed.
Following the BoE decision, the market will then start looking at the chances (or not) of further hikes and the latest Unemployment data on Wednesday 16th May and then Inflation on the Tuesday 22nd May will all be crucial. With Inflation having fallen and wages rising during April (leading to a lower call for interest rates to be hiked) these new pieces of information will be useful as an indicator of where both interest rates and Sterling exchange rates go next.
The Pound may well rise if the economic data at the beginning of May is particularly good but we will really need to see Inflation rising or much stronger economic growth to warrant a further hike in 2018 in my opinion. I am therefore cautiously optimistic over future strength for the Pound. It might be that some of the best rates to buy a foreign currency with the Pound are ahead of the interest rate decision if it looks likely they will hike.
With such uncertainty keeping in close contact with our expert team ahead of the news is the best way to help minimise the risk and maximise the opportunity.
The other key topic will of course be Brexit and we have the concerns over the Customs Union arrangements to contend with. The Government has bought themselves time with no immediate answers required but this issue and how it will shape the Northern Irish border will be key.
Any surprise progress could see Sterling rise, the next EU Summit is in June so this is perhaps when such concerns will play a greater role on the Pound once again.
May 24th see UK Retail Sales and then Friday May 25th the latest Gross Domestic Product (GDP) data providing a busy end to a key month for the Pound. On balance a stronger Pound if the Bank of England have raised or look likely to in June would not be a surprise. But with much of the good news priced in and Sterling finding itself at fresh highs on many currency pairs, there is a real danger rates slip back if expectations are not met.
With Sterling having hit fresh post-Referendum highs against the Australian Dollar and New Zealand Dollar clients concerned with buying these currencies have some excellent opportunities. Clients buying Euros with Pounds are buying at close to a 1-year high and whilst the US Dollar has risen lately, clients buying US Dollars with Pounds did hit the post-Referendum high too in April.
The 10th of May will bring the BoE interest rate decision and events around it will shape Sterlings fortunes during May, so make sure you have highlighted your position to our team to help us manage your exposure.
The key factor driving the Euro has been the outcome of the latest ECB (European Central Bank) meeting where policy was as expected unchanged, but Mario Draghi highlighted some fresh concerns over protectionism and a general slowdown in the Eurozone economy.
This makes the early economic data due in May more important with GDP and Unemployment on Wednesday 2nd. The 3rd sees Inflation data and Friday 4th sees Retail Sales. All will be assessed for clues as to how they might shape future policy from the ECB decisions.
Economic performance in the Eurozone had ended 2017 very well and has been a very strong area of confidence, however Mario Draghi did cite concerns over the pace of this growth in his April speech. Any signs Eurozone growth is slowing further would be viewed badly as it would indicate the ECB might need to continue its looser monetary policy for longer.
The ECB had been looking to gently raise interest rates and reduce its QE (Quantitative Easing) program. QE is the process whereby the ECB has increased the money supply liquidity in the Eurozone financial system, buying up bonds and lending to banks. This has helped the Eurozone through a tough time economically and very recently the ECB has been praised for its efforts.
The Wednesday May 24th ECB Minutes could be a big driver and the big question now is with Inflation falling, will the ECB have to do more QE for longer to help get their economy to the 2% Inflation target.
Despite these concerns the Euro should remain fairly-well supported against the Pound in May although there are some real prospects for the Pound to make gains into fresh territory, building on the move to 1.16 seen in April. This will largely depend on the outcome of the UK interest rate decision on the 10th May. Unless the BoE is very positive I dont expect the Pound to Euro rate to rise dramatically, it is reasonable to expect it to remain in these more familiar ranges but if the UK data is good and the Euro data poor, a move towards the higher teens is closer than it has been in a year.
May is a very crucial time on GBPEUR rates which touched fresh highs in April. It does seem more likely than not GBPEUR would rise higher as Sterling continues to impress owing to the UK interest rate hike expected in May, plus the weaker Euro at the hands of a more cautious ECB.
The fact the UK decision is by no means guaranteed on May 10th and the Eurozone economy is still outperforming the UK does indicate a degree of caution for Euro buyers is necessary. On GBPEUR the possibility of fresh levels in the higher teens seems to beckon although this will need some very strong news on UK interest rates plus further clarification on the Irish border and Customs Union.
I would expect to see GBPEUR levels in a range between 1.13-1.17 for May, gently pushing higher but only steadily so, with the longer-term uncertainty over Brexit acting as an anchor, holding back any dramatic increases from the Pound.
Key US data is Inflation on 10th May, Retail Sales on 15th May and the Fed minutes on 22nd May.
The US Dollar has been much stronger as we enter May with US Treasury yields up at record levels hitting 3%. Essentially investing in US government debt is now at a very favourable and record level which is attracting investment. To buy US bonds investors need to convert to US Dollars and this increases the Greenbacks appeal.
May begins with some key news on the US Dollar with the US interest rate on the Wednesday 2nd May and whilst the Fed are not expected to be raising interest rates we could see some fresh commentary over what is likely in the longer term.
Friday May 4th sees the latest US Non-Farm Payroll data. US unemployment is also released at this time which may see a busy afternoon on US Dollar rates. I would expect strong news here to help the US Dollar, the US labour market has been buoyant helping raise the prospects of future interest rate hikes. The US Dollar has risen as markets price in the possibility of further interest rate hikes this year, possibly two.
We are also witnessing an easing of trade concerns which had seen the US Dollar weaker. Where Trump had seemed poised to pursue tariffs on up to $150bn of Chinese goods, the tensions have calmed helping sooth worries over the possible negative effects on the US economy. We might also have a deal on NAFTA (North Atlantic Free Trade Agreement) too which is also good for the US economy.
Important US economic data is the Consumer Price Index Inflation data on Thursday May 10th, Tuesday May 15th Retail Sales and the Wednesday 22nd May Fed minutes. All will be seen in the light of events outlined above and how they might alter the Feds view of possible future interest rate hikes.
Issues on the US Dollar are never straightforward with the currency also being viewed as a safe-haven investment. This means in times of economic and political uncertainty it can strengthen, however generally speaking the mood has been more optimistic as the year has progressed.
Global concerns over North Korea had threatened to cause the ‘flight to safety which so often has caused US Dollar strength. Whilst such tensions could rise again from potentially troublesome situations with Iran, Syria or Russia, it seems that the gentle improvements in confidence are not triggering such behaviour from the US Dollar.
GBPUSD is trading back in the higher 1.30s at the time of writing and whilst a move back over 1.40 does seem very likely if the UK raise interest rates and the UK data is strong, the potential for rates to move back into the 1.35s seems very real too. With US interest rates much higher than the UKs and the UK remaining fragile in both political and economic spheres, the market in May could well favour the US Dollar against the Pound.
The RBA Meeting Minutes on the 15th May will be vital as will Unemployment data due that same day.
May begins with some important data for the Australian Dollar with the Reserve Bank of Australia (RBA) interest rate decision on May 1st. Interest rates are a key driver on a currency and whilst the Australian Dollar has generally been weaker in 2018 because no interest rate hikes are planned soon, the next move from the RBA does seem likely to be higher.
Any commentary on this from the RBA could send the Australian Dollar higher but the general direction for the currency has been lower. A key factor here has been the shifts in tone and raising of interest rates by other central banks, notably the US Federal Reserve. With the Feds next meeting and decision on the 2nd May, the very start of May could be volatile for the Australian Dollar.
The Australian Dollar has been historically favoured by investors owing to the higher interest rate which offered a higher return. Interest rates are key driver for a currency and as other central banks have looked to raise their interest rate, the attraction of the Aussie has diminished.
With US interest rates now at 1.5-1.75% versus the 1.5% in Australia the arguments to hold the Aussie have lost ground. Investors looking for better returns have been more attracted to the US Dollar when looking to perform such transactions. The US Federal Reserve are not expected to be raising interest rates but any commentary there could see a stronger US Dollar and a weaker Australian Dollar as investors shift their funds from the AUD to the US Dollar.
The early part of May looks like being the busiest time for GBPAUD exchange rates with lots of key economic data in the first week of May and the eagerly awaited UK interest rate decision on the 10th May. If the tone from the RBA is not so positive and the tone from the BoE is positive GBPAUD rates could easily test the 1.90 mark, a positive tone from the United States too would make this a real possibility.
It is difficult to see a move below 1.80 but any very strong news from the RBA and if perhaps the BoE dont hike, this would be a possibility. Whatever these central bankers say the gentle expected progress of the BoE and improvements in the outlook on Brexit should see Sterling gently rising against the Aussie.
There is still plenty of news to move GBPAUD rates the rest of the month, depending on what the central banks have said at the beginning, investors will be looking for clues in the remaining economic data releases.
On the Australian Dollar side the RBA Meeting Minutes on the 15th May will be vital as will Unemployment data due that same day. The RBA have linked wages and unemployment to raising their interest rate so this could be a market mover.
The market seems more likely to favour the Pound over the Australian Dollar once again in May. Clients looking to buy or sell Australian Dollars in the future should get in touch early on to mitigate the shifts expected early in the month.
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