By James Tucker
This week has been another reminder that politics and global events can be just as important as economic data. The biggest influence has been the renewed tension between the US and Iran, which briefly pushed investors towards the US Dollar as a safe haven. At the same time, concerns over oil supplies lifted energy prices before they eased again, meaning currency markets spent much of the week reacting to headlines rather than scheduled economic releases.
Pound–Dollar
Sterling enjoyed a positive week against the US Dollar. The Pound was helped by softer-than-expected US employment data, which reduced expectations that the US will keep interest rates high for as long as previously thought. Although the Dollar did strengthen whenever tensions between the US and Iran escalated, those gains proved short-lived as investors became less convinced the conflict would spread further. Overall, the weaker outlook for the Dollar allowed Sterling to recover well and finish the week on the front foot.
Dollar–Euro
The Euro also gained ground against the Dollar this week. Confidence in the US currency faded as markets reassessed the outlook for the American economy and interest rates. Meanwhile, the Euro continued to find support from expectations that the European Central Bank will remain cautious about easing policy too quickly, particularly with energy prices still creating inflation risks across Europe. While geopolitical tensions have prevented a bigger move, the balance of the week has favoured the Euro over the Dollar.
Pound–Euro
The Pound–Euro rate remains the most interesting pair. Sterling has continued to outperform the Euro thanks to improving confidence in the UK and a softer US Dollar, allowing the Pound to remain close to some of its strongest levels against the single currency in over a year. However, there are signs that the rally is beginning to lose momentum. Renewed tensions between the US and Iran have pushed oil prices higher at times, and because the UK is heavily reliant on imported energy, prolonged higher oil prices could put more pressure on the UK economy than on the Eurozone. Political uncertainty in the UK is also starting to attract more attention, with markets watching closely for any changes in government policy over the coming weeks.
Looking ahead, the biggest risk for Pound–Euro is that Sterling has already priced in much of the recent good news. If tensions in the Middle East continue to escalate, or investors become more cautious about the UK’s economic outlook, the Euro could begin to recover some lost ground. While the longer-term picture still favours a relatively strong Pound, the chances of Sterling slipping back against the Euro have increased, making it a pair worth watching closely over the coming weeks. So, keep in close contact with your currency consultant to help you make the most of your money.