Monthly July Currency Focus: GBP Undermined by Political Uncertainty
Good morning. In today’s post I’ll take a look back to see how some of our most commonly traded currencies performed in June, and what we might see happen in July. Heightened political uncertainty in the UK continued to drag on the Pound, while the US Dollar weakened after hints from the Federal Reserve that it was prepared to begin cutting interest rates. I will focus on Sterling (GBP), Euro (EUR), US Dollar (USD), Australian Dollar (AUD) and Canadian Dollar (CAD). To get a quote to see what rate we can offer you, please get in touch.
Pound Sterling Forecast (GBP)
The Pound struggled through much of June as a direct result of the continued uncertainty hanging over UK politics. This was driven by the Conservative leadership election, with GBP investors unnerved by concerns that the risk of a no-deal Brexit would be elevated should frontrunner Boris Johnson become the next PM.
While Sterling made an attempt to rally in the second half of June on the back of the weakness in its peers, this proved short lived thanks to the Bank of England’s (BoE) latest policy decision.
Looking ahead, while the Tory leadership election will conclude this month we expect to see political uncertainty continue to drag on the Pound as observers speculate that a general election may not be far behind, especially if the new PM pursues a course that appears to put the UK on the path towards a no-deal Brexit.
Euro Forecast (EUR)
The Euro trended higher last month thanks to broad weakness in some of its major peers. This uptick in EUR exchange rates was also partly attributed to a slight improvement in Eurozone data, which helped to lift some of the gloom hanging over bloc.
However, it wasn’t all smooth sailing for the Euro in June, with EUR exchange rates being knocked in the second half of the month by a market moving speech from European Central Bank (ECB) President Mario Draghi.
Speaking at the ECB’s annual conference in Sintra, Draghi signalled that the bank is prepared to pump further stimulus into the Eurozone (including potentially lowering interest rates) prompting speculation of a rate cut by the end of 2019.
So far in July the Euro has put on a mixed performance, with the nomination of Christine Lagarde as the next President of the ECB prompting expectations that the ECB will maintain its dovish policy stance and disappoint those who had been hoping for a more hawkish leader at the bank.
EUR investors will remain focused on the ECB for the remainder of July on the expectation that the bank may provide more monetary policy guidance following its rate decision at the end of the month.
US Dollar Forecast (USD)
The US Dollar suffered a rare misstep last month, with the ‘Greenback’ facing broad losses after the Federal Reserve signalled that it is prepared to begin reversing some of last year’s rate hikes.
While USD exchange rates briefly rallied on the back of safe-haven demand, the rebounded proved fleeting as Fed Chairman Jerome Powell spoke of the need for the bank to take ‘appropriate’ measures in order to protect the US economy from a slowing global economy following the bank’s June policy meeting.
This was widely interpreted as a signal that the Fed would begin cutting rates immediately, leading USD investors to price in a July rate cut.
While a rate cut from the Fed is almost guaranteed this month, a question remains over the extent at which the bank will lower rates, with most USD investors pricing in a cut of only 25 basis points. If the Fed surprises with a cut of 50 basis points it could lead to a sharp drop in the US Dollar.
Australian Dollar Forecast (AUD)
The Australian Dollar was mixed last month, with the ‘Aussie’ initially struggling after the Reserve Bank of Australia (RBA) lowered interest rates to a new record low, as outlined in my colleagues post yesterday.
This was followed by some worrying Chinese economic data, which stoked fears that Australia’s largest trading partner was feeling the pressure from its trade dispute with the US, concerns over which also dragged on AUD exchange rates.
However, the Australian Dollar rallied through the second half of the month, ultimately closing out June higher as a risk-on mood prevailed in markets following the dovish shift in the Fed.
Despite the RBA starting this month by implementing its second consecutive rate cut, the Australian Dollar continues to show remarkable resilience thanks to the continued rise in risk appetite in the wake of the US-China trade truce.
Canadian Dollar Forecast (CAD)
The Canadian Dollar trended higher in June, with the oil-sensitive currency climbing thanks to a strong rebound in crude prices driven by the heightened tensions in the Middle East.
Further buoying the ‘Loonie’ was a surprisingly strong domestic inflation reading in May, which boosted hopes that the Bank of Canada will be able to leave interest rates on hold for the time being.
This will be put to the test later this month as the BoC concludes its latest policy meeting, with the Canadian Dollar likely to face some headwinds if the bank follows the trend of other central banks in adopting a more dovish stance in its forward guidance.
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