By Lauren Buckner
As the US reopens following Thanksgiving last Thursday the US dollar remains weakened following the release of the minutes from the recent Fed meeting. Sterling currently sits at its highest level vs the Dollar since mid-August whilst the Euro has moved to a five month high. The US Dollar has been historically strong due to a heady mix of more stable economic data, risk aversion and an expectation of more aggressive interest rate rises than the UK and the EU. Predicted interest rate levels still being a very significant dictator in exchange rates at present as investors see a leap from historic lows.
The detail of the minutes show that the majority of the members feel that it may now be appropriate to begin to slow the rate of interest rate increases as they believe they are beginning to see the rise in the rate of inflation begin to slow, an outlook rumoured to be favoured by both the ECB (European Central Bank) and the BofE (Bank of England) as well. This means that the market now expects a 0.5 raise in interest rates at the Federal Reserves mid- December meeting and 0.25pc following this peaking at between 4.75-5pc. The current benchmark lending rate in the States sits at 3.75-4pc, a 14 year high.
Sterling has benefitted against the Euro from a refocus on interest rates as UK interest rates currently sit at 3pc versus the EUs 1.5pc (for deposits). As predictions trickle down that both banks will follow suit and signal slower than previously expected raises to the rate of interest in their upcoming December meetings – both on December 15th! The ECB in particular historically favour a dovish tone on interest and therefore are likely to push the brakes harder than the BofE – meaning the Pound represents a better investment at this point.
Coupled with a boost to the UK economic outlook from Nicola Sturgeon’s failure to secure an independence referendum without the support of Westminster, we have seen Sterling surprisingly push higher against the single currency to levels seen briefly in October and then back in May this year, an EXCELLENT trading opportunity which remains fragile.
The short term view still appears to be that the UK will experience a sharper and perhaps longer recession compared to Europe as the global economy is hit from rising inflation in the coming months, particularly linked to Russia’s invasion of Ukraine. This is due to the fact that the UK does not hold a trade surplus – we import more than we export at a manufacturing level, and therefore will be hit harder by price rises over the coming months. Those with a requirement to convert the Pound in to another currency over the next 3-6 months should be aware of the risks. Get in touch with your Account Manager to discuss the options available on your upcoming transfer, forward contracts in particular could allow you to secure your currency now without the full GBP being available.
The week ahead
Today
EU – ECB Lagarde speech
Tuesday
UK – mortgage approvals
EU – consumer confidence
Economic sentiment
German inflation rate YoY
US – consumer confidence
Wednesday
UK – nationwide house price survey
EU – German unemployment rate
EU core inflation rate
US – ADP employment change (Nov)
Growth rate 2nd estimate (Q3)
Pending home sales
FED chair Powell speech
Thursday
UK – manufacturing PMI
EU – manufacturing PMI
Unemployment Rate (Oct)
US – CPI
ISM Manufacturing PMI
Friday
EU – ECB Lagarde speech
US – non-farm payrolls
Unemployment rate