By Kian Songra
Earlier this week:
Investors remain on edge following US President Donald Trump’s latest tariff threats and the extended deadline for reciprocal duties, which continue to dampen risk appetite and support safe haven flows into the US Dollar. The Dollar has made good ground on its major peers this week, possibly due to investors starting to feel the markets settling down, but it still presents a good buying opportunity for those with Sterling in hand.
Sterling came under fresh pressure on Tuesday as UK debt fears resurfaced, with the Office for Budget Responsibility (OBR) issuing its latest risk report, that warned the government’s debt path is on an unsustainable footing. This has kept the Pound suppressed against its major peers, with investors not attracted to UK assets currently. With renewed fear about the autumn budget, the recent welfare spending bill could mean an increase in taxes or spending cuts. This uncertainty is keeping investors cautious for now, as the current sentiment around the UK economic health is weighing heavy on their minds.
Friday Focus:
This morning’s 7 am release of the UK’s May GDP, originally forecast at 0.1% month on month, instead revealed a contraction of -0.1%, marking a disappointing and unexpected downturn. However, over the last three months the UK economy overall has grown by 0.5%. May’s contraction was driven by a slump in industrial production, and construction work, with modest growth in the services sector. This weaker than expected figure delivered immediate pressure on the Pound, with GBP/USD and GBP/EUR dipping sharply as markets reassessed the UK’s growth outlook and factored in renewed concerns about economic momentum, and the increasing likelihood of interest rate cuts from the Bank of England.
The UK government continues to struggle with fiscal credibility and therefore international investors are not attracted to UK assets currently, amidst uncertainty in its finances. This spells nervous times for the Pound as we move into the second half of the year, with risks seemingly building. For now, the GBP/EUR exchange rate decline remains orderly, with the down-trend being a result of growing unease over the UK’s economy and national debt, as well as exogenous drivers that includes improving demand for European assets.
Those with Euros in hand selling a property for example, could look to take advantage of this gain against the Pound, as economic data has continued to weigh on the Pound. Those waiting for the Euro to gain further strength, should be cautious as this positive movement for the Euro, could easily be regained if the Pound bounces back.
For those of you with upcoming currency needs related to property transactions, such as mortgage payments, deposits, or overseas purchases, this GDP miss could present both a challenge but also an opportunity. A softer Pound means that buying foreign currency now could cost more, increasing the overall expense of your transaction. On the other hand, delaying could expose you to further depreciation. In such uncertain conditions, using hedging strategies like forward contracts or target rate orders can help lock in rates and protect your budget.
Next week brings with it pivotal high impact data releases, like UK inflation and unemployment, so it may be worth removing any risk by securing your currency ahead of these impactful data readings. Our team is on hand to guide you through the options and help you make an informed decision based on current market conditions.