It has been another steady week for sterling, which remains close to its strongest level against the euro in more than a year. The pound also made modest gains against the US dollar over the past seven days, helped along by a run of softer than expected American economic data rather than any fresh UK news.
With the Bank of England’s interest rate advantage over the eurozone continuing to underpin sterling, and a packed calendar of UK data due over the coming days, this week could prove important for anyone with a currency transfer on the horizon. Here is what has been driving the markets, and what is worth keeping an eye on.
Latest market insights:
Pound to euro:
- Sterling has spent much of July and August close to its strongest level against the euro in around thirteen months, and that has continued this week, with only a very slight easing of around 0.1%. The main reason behind this strength remains the gap between interest rates in the UK and the eurozone. The Bank of England has kept its main interest rate at 3.75%, while the European Central Bank has held its own rate lower, at 2.25%. When one country’s interest rates are notably higher than another’s, it tends to make that country’s currency more attractive to hold, all else being equal.
- At its last meeting in July, the Bank of England voted 6 to 3 to hold rates, with three policymakers wanting to raise them straight away. That was a bigger vote in favour of a rise than at the previous meeting, another sign that the Bank may be leaning towards higher rates rather than lower ones, and it has reinforced the view that a further cut in rates is unlikely in the near term.
- UK growth figures released in the past week also came in more resilient than expected, providing further reassurance, and the UK will be hoping for more of the same this week, with several key data releases due. Tomorrow brings the latest labour market data, including average earnings and the unemployment rate, and stronger than expected figures could provide further support for the pound against major currencies. On Wednesday, attention turns to the latest inflation figures for July, and if these show inflation rising, that could strengthen expectations that the Bank of England may need to raise interest rates, which would be expected to provide further support for sterling. With both labour market and inflation data due this week, there could be plenty of movement in the pound in the days ahead.
- None of this means sterling’s current strength is guaranteed to continue. Exchange rates can move in either direction, often quickly, and a change in the data or in central bank thinking could shift things at any time. That is exactly why it is worth planning ahead if you have a transfer coming up. 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 US dollar has had a softer week, slipping around 0.1% against the euro, with the euro trading near its highest level against the dollar in around two months. The main driver has been a run of weaker than expected US economic data, including signs that price pressures within the US economy are easing, which has led markets to pull back their expectations of a near term interest rate rise from the Federal Reserve. When investors expect a central bank to raise rates by less than they previously thought, that currency tends to become less attractive to hold, which is part of why the dollar has eased.
- The euro, meanwhile, has found some support of its own. The eurozone economy grew by 0.4% in the second quarter, its strongest pace in around a year, and there is growing expectation that the European Central Bank could raise its own interest rate again in September.
- The conflict between the US and Iran, which has disrupted oil shipments through the Strait of Hormuz since February, remains an important backdrop for all three of our currency pairs. It has kept oil prices volatile and pushed up the risk of higher inflation, which in turn affects how central banks think about interest rates. At times when global uncertainty rises sharply, investors also sometimes move money into the dollar as a perceived place of safety, which can push its value up against other currencies. That effect has not been the dominant one this week, with the softer US data having the bigger impact, but it is worth bearing in mind if the situation in the Middle East were to escalate further.
Pound to US dollar:
- Sterling gained around 0.2% against the dollar over the past week and briefly touched a three month high. As with the euro, this has been driven mainly by the dollar’s own weakness rather than fresh UK news, following the softer US data discussed above. The UK’s higher interest rates, together with a calm political backdrop following last month’s transition to Andy Burnham’s government, have also played a supporting role.
What to watch this week:
Tuesday 18 August:
- UK employment and wage growth figures, which could influence how the Bank of England thinks about interest rates at its next meeting in September
Wednesday 19 August:
- UK inflation figures for July, one of the last major readings before the Bank of England’s next decision
- Minutes from the Federal Reserve’s last meeting, which may give clues on how divided policymakers are over further US rate rises
Thursday 20 August:
- Weekly US jobless claims, a regular measure of the health of the American jobs market
Friday 21 August:
- UK retail sales for July
- Early survey data covering the UK, eurozone and US economies, giving a first read on how each is performing heading into autumn
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.
