Monthly Currency Focus: GBP Down on Brexit Concerns, USD Boosted by Fed Hike Hopes
We’ve seen some pretty notable movement in the currency market over the last few weeks, with the Pound falling from its best levels amid ongoing Brexit concerns, the US Dollar recovering from its January downtrend and the Euro being bolstered by German coalition developments. In today’s post, we’ll take a look at the main currencies we trade.
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Pound Sterling (GBP)
Sterling surged in the wake of the Bank of England’s (BoE) first policy decision of 2018, with the British currency climbing against most the majors as the central bank indicated that further rate hikes are on the way. The Pound was also supported by the BoE’s decision to raise growth forecasts – but GBP’s gains weren’t to last. Sterling swiftly plummeted from its best levels after the EU’s chief negotiator Michel Barnier implied that the UK may not be granted a transitional Brexit deal. Barnier asserted; ‘I’m surprised by these disagreements and if they persist, a transition is not a given. I wasn’t talking about a threat. We have to bear in mind what the UK has said. I have some problems understanding the position.’ Shadow chancellor John McDonnell also asserted that the ongoing Brexit uncertainties could still lead to another referendum or general election. Over the next few weeks Brexit developments will keep Sterling on its toes, with further signs of divisions within the Conservative party weighing on the Pound. Other UK news to focus on includes the nation’s inflation, retail sales and employment numbers. If key ecostats support the case in favour of an interest rate hike from the BoE, it may limit the Pound’s losses.
Positive data from the Eurozone, US Dollar weakness and developments in German coalition discussions kept the Euro elevated in January, but the common currency came under a little pressure as February got underway. EUR exchange rates stumbled as European Central Bank (ECB) President Mario Draghi defended the institution’s loose monetary policy. He stated: ‘While our confidence that inflation will converge toward our aim of below, but close to 2 percent has strengthened, we cannot yet declare victory on this front. Monetary policy will evolve in a fully data-dependent and time-consistent manner.’ The Euro also came under pressure as the US Dollar rebounded from its recent lows. If the ECB remains cautious on the subject of tightening monetary policy over the next few weeks, the Euro could give up further ground. EUR may also start feeling the pressure in the build up to the Italian election.
US Dollar (USD)
In February the US Dollar started recovering from a prolonged period of weakness as hopes that the Federal Reserve will increase interest rates in March rose. The central bank increased borrowing costs in December and indicated that they could rise a further three times over the course of 2018. If it appears that four rate hikes are more likely than three, the US Dollar could edge higher in the months ahead. With US monetary policy in focus, investors will be paying close attention to high-profile US data – including the nation’s inflation and employment figures. Any results which lower the odds of four rate hikes taking place this year would be US Dollar-negative.
Australian Dollar (AUD)
Recent hints from the Reserve Bank of Australia (RBA) have undermined demand for the Australian Dollar. The RBA indicated that it’s in no rush to increase interest rates, with Governor Philip Lowe implying that the central bank won’t be pushed into making an adjustment just because other central banks are taking action. Lowe noted: ‘We did not lower our interest rates to the extraordinarily low levels seen elsewhere after the financial crisis. Just as we did not move in lock-step on the way down, we don’t need to do so in the other direction.’ The Australian Dollar could struggle over the next few weeks as the Fed gears up to hike interest rates in March. Commodity price fluctuations and local reports (including Australia’s employment figures) could also prove influential.
New Zealand Dollar (NZD)
Although the New Zealand Dollar has been able to gain on a broadly weakening Pound, other NZD exchange rates haven’t fared so well. The Reserve Bank of New Zealand’s (RBNZ) chief economist implied that flagging NZ growth could prompt an interest rate cut. John McDermott was quoted as saying: ‘The market thinks ‘you guys are never gonna [cut]. They’ve been through almost a whole year of ‘there’ll be no chance you guys are going to cut interest rates.’ Well, that’s not true. We kept saying there’s an equal probability that the next move could be up, or the next move could be down.’ The RBNZ’s upcoming 2-year inflation expectation for the first quarter could prompt some NZD exchange rate movement, but investors will also be looking ahead to the next dairy auction. Dairy prices rose at the last auction, and the New Zealand Dollar could benefit if the price of New Zealand’s key commodity keeps rising.
Canadian Dollar (CAD)
A spate of less-than-impressive Canadian data has limited the Canadian Dollar’s upside potential in recent weeks. The most recent data to disappoint was the nation’s employment figures, with the Canadian unemployment rate unexpectedly rising to 5.9%. Stumbling oil prices have also kept the Canadian Dollar under pressure. Canadian reports are in short supply in the days ahead, so investors will now start looking ahead to the next Bank of Canada (BOC) interest rate decision on 7th March.
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