By James Tucker
This week the Euro and the US Dollar were both driven mainly by expectations around interest rates, inflation, and global investor confidence. The Dollar stayed relatively strong because traders still believe the US Federal Reserve will keep interest rates higher, for longer than many other central banks. Higher US interest rates usually attract investors into Dollar-based assets, which increases demand for the Dollar. At the same time, some cautious market sentiment linked to geopolitical tensions and slower global growth also supported the Dollar because it is still viewed as a “safe haven” currency.
The Euro had a more mixed week. It gained support at times from expectations that the European Central Bank may stay cautious about cutting rates too quickly, especially while inflation in parts of Europe remains stubborn. However, weak economic data from Germany and concerns about slower Eurozone growth limited stronger Euro gains. Investors are still worried that the European economy is weaker than the US economy overall, which keeps pressure on the Euro against the Dollar.
The Pound-to-Euro exchange rate dropped because the Pound weakened rather than because the Euro became exceptionally strong. Several factors hurt Sterling this week. UK retail sales and economic confidence figures disappointed markets, increasing expectations that the Bank of England could eventually cut interest rates. When traders expect lower UK interest rates, the Pound often falls because UK investments become less attractive internationally.
Political uncertainty in the UK also put pressure on Sterling. Andy Burnham’s leadership challenge has plunged the Labour government into chaos, and as a result the Pound to Euro rate fell a cent from close of business yesterday. Currency markets dislike instability, and growing concerns over the UK political outlook made investors more cautious about holding Pounds. At the same time, the Euro was supported by relatively stable ECB expectations, so the Pound lost ground against the Euro, even though the Euro itself was not especially strong.
Overall, the drop in the Pound-to-Euro exchange rate this week was mostly caused by weaker UK economic sentiment, rising expectations of future Bank of England rate cuts, and political uncertainty reducing confidence in Sterling. So in these uncertain times, please stay in close contact with your currency consultant to help navigate the increasingly volatile markets.