By Matt Boyle
It has been central bank policy that has driven market and exchange rate movements for some time now and this looks set to continue. Following last month’s 0.25% rate cut by the Bank of England, the UK inflation reading increased – contrary to what would be expected given this decision to cut.
With the BoE’s target for inflation at 2%, the reading of 3.8% is still way above target, with the result any further cuts for the short-term are off the table.
With higher interest rates being good for a currency, as the higher interest rate attracts foreign investment, the reduction in probability the BoE will cut again soon, allowed GBP>EUR rates to creep back to the top of its recent trading range and to multi month highs. Good news for buyers with upcoming requirements, frustration perhaps for sellers hoping to see the rate continue to drop.
This could however change and soon, catalysed not by developments in the UK or Europe, by in fact of what is happening in the US and the Federal Reserve.
At the recent rate-setting meeting in the US, most members of the Federal Reserve committee voted to hold US interest rates. Since then the FED has come under increased pressure from US President Trump to cut rates. So much pressure in fact, that markets are now pricing in an 80% likelihood the FED will cut rates in September.
In addition, efforts by Trump to remove Federal Reserve Governor Cook have now sparked a legal battle in the US, with Cook planning to sue Trump. This looks likely to end up in the Supreme Court, and will raise questions about the US central bank’s autonomy.
Regardless of the outcome, as markets begin to price a likely US rate cut in, this will cause the Dollar to weaken further, pushing investors and the global movement of money elsewhere, with much of it likely to end up in Europe. Essentially as the US Dollar begins to weaken, the Euro will gain strength and as it does GBP>EUR rates will drop.
With the UK budget looming and media coverage growing by the day about tax hikes, increases in inheritance tax and rises in property tax it looks set to be a rough few months ahead for GBP.
While Cook’s legal challenge in the US, could put Trump and a FED rate cut on pause, if the US do cut rates and we see an aggressive budget from Rachel Reeves at the end of October, recent highs in GBP>EUR would be long gone. Buyers of Euros with upcoming requirements may want to consider taking out this risk utilising a forward contract.
Sellers will want to be careful given the challenge posed by Cook to Trump, particularly given she has called Fed Chair Jerome Powell and the members of the Fed Board as defendants in her case. In addition, with the European Central Bank seemingly holding a stronger fort than the FED and BoE, and not being expected to cut rates until December – any chance this could change the landscape are essentially off the table.
Should you have an upcoming requirement to buy or sell currency speak to your Currency Consultant today. We can provide professional and friendly guidance and offer several ways in which you can secure currency and reduce risk. Call us today to help make your money go further.