Last week’s headline event delivered exactly the kind of market-moving moment it promised. Federal Reserve Chair Kevin Warsh, in his first major speech since taking on the role, struck a notably firm tone on inflation, and the US dollar strengthened broadly as a result. Sterling and the euro both slipped against the dollar, though sterling held its ground against the euro itself. Below, we look at what happened, what it means for your transfers, and what this week’s run of US and eurozone data could mean next.
Latest market insights:
Pound to euro: sterling steady, but the rate gap is starting to narrow
- Sterling has held broadly steady against the euro over the past week, down around 0.2%, as dollar strength affected both currencies in a similar way. Looked at in isolation, it’s been a quiet week for the pair, but the backdrop is shifting in a way worth understanding.
- The story so far this year has been the gap between UK and eurozone interest rates: the Bank of England at 3.75% against the European Central Bank’s 2.25%. That gap is now expected to start narrowing. The Bank of England is widely expected to hold rates at 3.75% at its meeting on 17 September, but the European Central Bank is now widely expected to raise its rate from 2.25% to 2.50% at its own meeting on 10 September, with markets pricing a good chance of a further rise to 2.75% by the end of the year. Renewed fighting between the US and Iran over the weekend pushed oil prices back above $90 a barrel, adding to the inflation pressures that are driving the European Central Bank towards higher rates.
- None of this means sterling’s advantage disappears overnight. Even after an expected September move, eurozone rates would still sit well below the UK’s. But a narrowing gap, if it continues, would generally work against one of the main supports sterling has enjoyed against the euro this year. There’s no major UK economic data due this week, so the direction of this pair over the coming days is likely to be shaped more by the eurozone and US events covered below than by anything at home.
- On a housing note, Nationwide’s latest house price figures, published this morning, showed UK prices edging up 0.2% in August after a small dip in July, with annual growth holding at a modest 1.6%. Nationwide’s own economist described market activity as remaining subdued, citing the uncertain economic backdrop as one of the factors weighing on buyer confidence.
- For anyone buying a property in Europe, a 1% move against you on a €400,000 purchase would mean finding an extra £3,400, that is a significant sum to have to find at short notice. This is exactly the kind of situation our currency specialists help clients plan for. Rather than trying to guess which way the market will move, you can fix your exchange rate in advance for a future transfer date through a forward contract, or set a target rate you agree with through a rate order, so that you know in advance what you will need to budget for. There may be a deposit requirement for some of these arrangements. Our team can talk you through how each option works and whether it suits your situation. Call us on +44 (0)204 506 5672.
US dollar to euro:
- The dollar strengthened broadly on Friday after Chair Warsh delivered his first major speech since taking on the role, at the Federal Reserve’s annual conference in Jackson Hole. He described the Federal Reserve’s 2% inflation target as firm and fixed, and said policymakers need clearer evidence that price pressures are easing before they can be confident the job is done. That was enough to shift market expectations meaningfully: the odds of a US interest rate rise this month are now priced at around 60%, up sharply from roughly one in three before the speech.
- This week brings fresh evidence that could confirm or challenge that repricing. Preliminary eurozone inflation figures for August are due on Tuesday, and are expected to rise to around 3.2% from 2.9% in July, with renewed fighting between the US and Iran over the weekend adding to oil-driven price pressure. The same day brings a closely watched survey of US factory activity. Wednesday sees a widely followed early readout on US private sector hiring, Thursday brings a survey of the much larger US services sector, and Friday delivers the main event: the official US jobs report for August, the last major data point before the Federal Reserve’s own rate decision on 16 September.
- It’s also worth remembering the dollar’s role during periods of global uncertainty. When uncertainty rises, for example around the ongoing conflict in the Middle East, investors sometimes move money into the dollar as a perceived place of safety, which can push its value up against other currencies even while other factors point the other way. That dynamic may have added to last week’s dollar strength alongside the shift in interest rate expectations.
Pound to US dollar: caught in the dollar’s slipstream
- Sterling has slipped around 0.6% against the dollar over the past week, a move that has far more to do with the dollar’s broad-based strength than with anything happening in the UK specifically. The same rate advantage and calmer political backdrop discussed above continue to support sterling in the background, but the dollar has been the more powerful force this week.
- The same catalysts described for USD to EUR apply here too. A strong set of US data this week, and particularly Friday’s jobs report, would likely extend the dollar’s advance and could pull sterling lower against it. A weaker set of figures, especially on the jobs front, could hand back some of the ground sterling has lost over the past week. As ever, this isn’t something that can be predicted with certainty, which is exactly why planning ahead matters more than trying to time the market.
What to watch this week:
Tuesday 1 September:
- Preliminary eurozone inflation figures for August, expected to rise to around 3.2% from 2.9%. Also a closely watched survey of US factory activity.
Wednesday 2 September:
- A widely followed early readout on US private sector hiring, ahead of Friday’s official jobs report.
Thursday 3 September:
- A survey of US services sector activity, covering the largest part of the US economy.
Friday 4 September:
- The US jobs report for August, the single biggest US data release of the month, and the last major signal before the Federal Reserve’s 16 September rate decision.
If you have an international transfer coming up in the next few weeks or months, for a property purchase, a pension payment, supporting family abroad, or any other reason, the events of this week are a useful reminder that exchange rates can move quickly, and not always in the direction you’d hope.
The good news is that you don’t have to simply wait and see what happens. Speaking with a currency specialist costs nothing and carries no obligation. They can talk you through your options, including spot contracts for transfers you need to make now, and forward contracts for transfers you’re planning further ahead, and help you understand how today’s rate movements might affect your specific situation.
Contact Lumon on +44 (0)204 506 5672 for a free, no-obligation conversation and discover what options you have available to help.
