Currency update – GBP, EUR, USD, AUD, CAD, NZD

Below is a brief outline regarding how some of the major currency pairs have been performing. GBP/EUR in particular is back above €1.14 today folowing some weakness in the Euro.

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Pound Sterling – Brexit has remained one of the driving forces of GBP exchange rate movement over the last couple of weeks, with concerns that the UK would fail to reach an exit deal with the EU in time for the summit on 14th December piling pressure on the Pound. Although the UK and EU did eventually make a deal, concerns that discussions on trade and a transitional deal will be delayed until February next year left Sterling struggling. The EU summit could inspire considerable Pound movement on Thursday. If the tone adopted about the progress and path of Brexit negotiations is positive, the Pound could climb. This week GBP exchange rates will also be fluctuating in response to the UK’s inflation, employment and retail sales reports, as well as the Bank of England’s (BoE) interest rate decision. Any news which supports the case in favour of the bank leaving borrowing costs on hold in 2018 would be GBP-negative.

Euro –The collapse of coalition talks in Germany, the prospect of higher borrowing costs in the US and disappointing inflation data for the Eurozone have all conspired to keep the Euro under pressure over the last few weeks. Germany is still without a working government almost three months after the election, and failure to resolve the situation would weigh on the Euro heading into the New Year. EUR exchange rates could also weaken if the US Dollar rallies in response to the Fed’s latest interest rate decision, with a rate adjustment and hints of further hikes in 2018 having the potential to send USD soaring. However, the European Central Bank (ECB) is also due to deliver an interest rate decision before the end of the year. An optimistic tone from ECB President Mario Draghi and references to monetary policy being tightened in the year ahead could give the euro a lift.

US Dollar – Although the prospect of the Federal Reserve increasing interest rates in its December gathering has been lending the US Dollar underlying support over the last few weeks, the ‘Greenback’ has also been fluctuating in response to political developments. The positive impact of optimism surrounding President Trump’s tax reforms has been countered by fresh concerns about Trump-Russia relations and the controversial President’s decision to declare that Jerusalem is the capital of Israel. While a rate hike at the Fed’s December policy meeting would be good news for the US Dollar, the impact of the move may be limited given that we’ve been expecting it for months. However, if the central bank implies that we can expect more rate hikes over the course of the next 12 months, USD exchange rates could end 2017 on a high.

 Australian Dollar – The Australian Dollar benefited from a slightly more optimistic tone from the Reserve Bank of Australia (RBA) at the beginning of December, although a lack of appetite for higher risk currencies and falling commodity prices meant these gains were short-lived. If the Federal Reserve does increase US interest rates, and indicates that more rate hikes are on the way, demand for the ‘Aussie’ may slip as the year draws to a close.

New Zealand Dollar – While the New Zealand Dollar has been struggling since the national election resulted in a coalition between Labour and New Zealand First, the South Pacific currency soared in mid-December. The ‘Kiwi’ broadly strengthened as investors reacted to the news that Adrian Orr will be taking over as Governor of the Reserve Bank of New Zealand (RBNZ). Orr has an impressive CV and, with his previous experience as Deputy Governor of the RBNZ, the New Zealand Dollar benefited from the expectation that Orr will prove to be a safe pair of hands.

Canadian Dollar – Fluctuating oil prices and a dovish interest rate decision from the Bank of Canada (BoC) kept the Canadian Dollar on its toes as the year came to an end. CAD exchange rates broadly weakened after the BoC left interest rates on hold and implied that future adjustments would be data-dependent. With little high-profile news on Canada’s data calendar for the rest of December, global economic developments and risk appetite will be the driving force of CAD movement.

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