The Pound enters October with fresh uncertainty over Brexit as the market continues to try and understand what Brexit will mean. The strength of Sterling will remain linked to progress on talks and the likelihood of a no-deal scenario. The betting markets, often an interesting gauge on sentiments, have at it the time of writing, entered a 33% chance of no-deal.
October is an important month as the next EU Summit is scheduled for the 18th, with Brexit high on the agenda. It is difficult to see exactly where and when the progress will be made, but Sterling could enter a volatile period. We saw lots of volatility in September during the Salzburg EU Summit, Octobers is arguably more important.
Sterling will remain unpredictable so clients with a GBP transfer may wish to carefully consider their position and ensure they are fully up to date with the latest news and developments on Brexit.
On the economic front, the higher inflation data in September raises the prospect of the Bank of England (BoE) having to consider raising interest rates again. The 6-month high in the figures will put pressure on the BoE who have a mandate to keep inflation at 2%, Septembers figure was 2.7%.
Wednesday 17th is when the data is released and is therefore a key date as we will learn whether last months increase was temporary or the beginning of a new trend, which would warrant attention from the BoE. The next UK BoE decision is November 1st, when we also receive the latest Quarterly Inflation Report. It might be that the data we receive on the 17th will shape expectations for that meeting.
The pound is at the mercy of many political events in October. The Conservative Party conference could offer up some interesting developments. The growing talk of a second Referendum and the chance of Mrs May losing her leadership could all threaten Sterling in October.
Sterling had been supported from the improved prospect of cooperation between the UK and EU in finalising a Brexit deal. The mixed messages from the EU with Michel Barnier previously hinting ‘a deal is in sight conflicts with Donald Tusk stating the Chequers plan is ‘unworkable.
Mrs Mays defiant speech won her the support of the Brexiteers but saw Sterling lower. October could offer more impromptu speeches by all sides, increasing the scope for turbulence.
Whilst October may not in the end hold the final key to determining exactly what Brexit means, there looks very likely to be some key developments which could prove a turning point not just for Brexit, but also the pound.
The ECB will start the reduction of their monthly bond buying in October, down to 15bn from the 30bn previously taken; this could see some volatility as it is put into practice. I think a key question for the Euro will continue to be the extent to which the ECBs plans remain in place.
There had been fears Trade Wars would weigh on the tone from the Eurozones central bank. The fears of a global slowdown halting the recent positivity from the ECB do remain, but are perhaps not as worrying as previously believed.
Economic news is due to come thick and fast for the Euro during October with a number of important points of discussion. Early in the month, on the 1st, we are expecting the Unemployment data and Wednesday 3rd October sees the latest Retail Sales figures.
These releases will be viewed in the light of recent comments from the ECB and may influence short-term movements on Euro exchange rates.
The Thursday 25th ECB Interest Rate decision will attract the most attention, by then the Wednesday 17th October Inflation CPI data will be known.
Inflation, which measures the rise and fall in the price of every day goods, is a key factor for the ECB to make decisions on future policies.
Expectation would be for the ECB to remain upbeat about the track they are on, to reduce QE and raise interest rates in 2019.
Towards the end of the month, we have Gross Domestic Product data on Tuesday 30th and Inflation on Thursday 31st. I expect economic news to continue to support the view that the ECB should continue with its plans, this may result in the Euro strengthening.
There are other anxieties, which may influence the Euro too, including recent concerns over Italian debt and political concerns in Spain and across the Eurozone, over how best to manage migration. Such troubles could lead to a slightly weaker Euro but there is nothing of major concern for the markets at present.
October may see fresh developments on Brexit, which could lead to a volatile period for GBP/EUR exchange rates. We had 3% movement on interbank rates in September, which is a guide to the potential movement we may expect as the market reacts to the latest news.
A ‘no-deal Brexit remains a worrying prospect and whilst Sterling has benefitted from some recent upturns in sentiment, the lack of clarity may see Sterling to Euro rates remain in the 1.10-1.16 band, which has been seen since April.
A move below 1.10 could still be realised but the recent optimism has helped the Pound. GBP/EUR interbank rates falling below 1.10 could happen if a ‘no-deal is likely but any progress or breakthrough seems likely to have the most impact.
There are still many further hurdles ahead for the Pound with ratification of a final Brexit deal required from all EU members and also the UK Parliament.
Until Brexit is finalised the Euro is likely to remain the stronger currency compounding the costs for Sterling holders prepared to take the risk of Sterling weakening.
October looks set to be another volatile period on GBP/EUR but with expectations that Brexit talks may spill into November, there remains a distinct possibility that the greater move on GBP/EUR, whether higher or lower, will also be postponed.
The US Dollar looks set to remain strong in October despite having weakened in recent weeks owing to concerns of the effect of the Trade Wars on the US economy. The recent US interest rate decision saw the US raise interest rates but the Dollar slightly weaker.
A higher interest rate typically leads to a stronger currency and this is certainly true for the US Dollar up until now. However, whilst Americas central bank, the Federal Reserve bank, is expected to hike again in December, three times more in 2019 and then again in 2020, there are concerns.
What goes up must come down and the market is already eyeing up just how likely these further hikes will be and looking at some of the concerns which might derail the Feds plans.
The Trade War concerns that have seen tariffs of 10% on $200bn worth of Chinese goods is a prime example of the type of concern which might derail the current US Dollar strength. October is the month that these come into effect and are potentially disruptive to the US and global economy.
There are already a number of question marks over just how high US interest rates will eventually be, compared to the Feds plans. Any knock back for the ‘dot plot (the Federal Reserve’s schedule of interest rate rises) may lead to US Dollar weakness.
The US economy remains in a very strong position and there is some important economic news in October with the potential to move US Dollar rates early on in the month. Friday 5th is Non-Farm Payroll and Unemployment data, it will be interesting to see whether Hurricane Florence has negatively impacted the data. Thursday 11th is Inflation, Monday 15th October US Retail Sales, then Thursday 17th is the Federal Reserve Meeting Minutes which might prove insightful.
October could prove an interesting month for GBP/USD rates with the latest news on whether or not Trade Wars have escalated, plus for Sterling we will also learn of the latest news on Brexit with a key EU Summit taking place on the 18th October. Expectations are still very mixed on Brexit and GBP/USD looks set to continue to flirt with the 1.30 level, trading above and below on Brexit news. Good news sees the pound rise higher, bad news a fall. October is important for Brexit but many have a loose eye on November as a time we might see something more decisive on what Brexit means.
Sterling looks set to remain the weaker currency, the fundamentals all appear to favour the US Dollar but as mentioned above, there are mounting concerns over future US interest rates, and therefore the currency may well peak. It is possible that the GBP/USD range could be between 1.28-1.34 and the EU Summit and Non-Farm Payroll data to be the most
important days in the month
to see movement.
The Australian Dollar has been weaker in recent months as concerns over the Trade Wars weigh on the Chinese economy and therefore Australia, whose economy is so reliant on trade with them. Concerns domestically in Australian have also heaped pressure on the currency as there are concerns over which direction the RBA will take in the future.
Economic data begins early in the month for Australia with Tuesday 2nd Octobers Australian Interest Rate Decision and Statement. The Friday October 5th Australian Retail Sales could be a volatile release as well.
Overall I expect the Australian Dollar to continue to face some tough questions, which may continue to make it a risky currency to hold.
There has been a general weakening of the Australian Dollar going back some years, which is attributable to the rise of the US Dollar.
During the years after the financial crisis of ultra-low US interest rates, investors borrowed in low interest rate currencies (like the US Dollar) and invested in higher interest ones, like the AUD. This helped the Australian Dollar to rise but with the US now having a higher interest rate, the Aussie has been under pressure. Factor in the trade concerns and skepticism over whether the RBA will be hiking their interest rates anytime soon, and we can see why we have a much weaker AUD.
Aside from the important dates earlier in the month outlined above, the 16th sees the RBA Meeting Minutes and the 18th Unemployment. From China on Friday 19th we have Chinese Gross Domestic Product that will be monitored for signs of negative impact from trade disputes.
As with all pairings connected to the Pound, the UKs divorce from the EU is the big news to drive the exchange rate. We are expecting some kind of development on Brexit in the middle of the month with an EU Summit on the 18th, it might well however be that any deal is not really confirmed until November or even December.
Sterling has made some impressive gains against the Aussie since August, with the interbank rate climbing back over 1.80 and rising 10 cents above the 1.73 lows. However, fresh Brexit uncertainties could very easily derail this progress and send the interbank rate back down if ‘no-deal is becoming more likely.
We could see some of the biggest movement on GBP/AUD rates in the early part of the month when we learn of the latest RBA interest rate decision. Trade War developments will also be a feature on this pair, as will any big changes in global risk sentiment.
Overall, there looks to be no shortage of factors to drive GBP/AUD rates in October. Those with a GBP/AUD position should be expecting
another volatile period for
For information on the economic factors with the potential to impact your currency exchange this month, download our latest monthly currency forecast.
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