Will interest rates affect exchange rates this week?

By Grace Smyth

Wednesday brought some data releases worth a mention, mainly focus was on the US who posted positive employment change which saw an increase in employment from 142K previous to 296K. More people in employment provides a good indication for consumer spending and stimulating economic growth. This was however followed by a string of mixed results with poor monthly PMI figures and ISM employment and services new orders index, but better than expected ISM Services PMI which came in at 51.9 from the previous 51.2. Any result above 50 is seen as positive so another good result here. Yesterday’s main focus however was on the Federal Reserve’s monetary policy decision. The Fed raised its base rate from 5.00% to 5.25%; the 10th consecutive rise, and the decision came as expected by financial markets so no real surprises there. We have seen GBP-USD rates improve off the back of the result, providing another good opportunity for those looking to buy US Dollars. The policy statement which followed did however indicated that the Fed anticipates it could soon take a pause on its aggressive monetary tightening, although it’s unclear if this will be in time for the next meeting in June.

Eurozone unemployment also came in positive yesterday posting 6.5% and a 0.1% improvement from previous figures. Again another indication that employment change is slowly starting to improve. Pound-Euro rates have remained fairly stable for the month of May so far. We have seen a few swings in the rates but all within a cent range and so far this month there has been very minimal market reaction to data releases, but that could potentially change today. The European Central Bank is due to announce their latest interest rate decision. Markets will be anticipating the result as the ECB has been the most hawkish of the major central banks when it comes to rate hikes and markets are expecting this stance to continue today. It’s not clear if the ECB will choose to raise rates by 25 basis points or 50. Certainly an event to be mindful of which is due to be announced at 12:15. Should you have a need to secure Euros it might be worth getting in touch with your contact here at A Place in the Sun Currency ahead of the results to discuss you options, as typically when interest rates rise the corresponding currency strengthens meaning there is every possibility that it could become more costly for you to buy your euros come the afternoon.

The UK is the last of the big trio to announce their rate changes on the 11th, again they have indicated a small rise, potentially by another 25 basis points and markets are likely to react to this head of the event. Which all three major banks raising rates it’s provided a fairly even playing field which is why the big swings in rates seen historically during these meetings is minimal now but the small movements could still make a huge difference on your costs and currency returns so stay in touch with your account manager to be kept updated and discuss the options we provide to help you lock in your requirements to best suit you.