Sterling has spent much of the summer close to its strongest levels against the euro in more than a year, helped by the gap between UK and European interest rates. This week the focus shifts across the Atlantic, where a new Federal Reserve chair takes to the podium at the world’s most closely watched economic gathering. Here’s what it could mean for your euro, dollar and sterling transfers.
Latest market insights:
Pound to euro:
- Sterling has eased back slightly against the euro over the past week, down around 0.1%, but remains close to the 13-month high it touched in mid-July and is up by more than 1% compared with this time last year.
- The main support continues to be the gap between UK and European interest rates. The Bank of England is currently holding its base rate at 3.75%, well above the European Central Bank’s 2.25%. When one country’s interest rates sit meaningfully above another’s, holding that currency can become more attractive to investors, which tends to support demand for it, though this is never guaranteed and can change quickly.
- The political backdrop has also helped. The transition to Prime Minister Andy Burnham and Chancellor John Healey has been orderly so far, removing a source of uncertainty that had weighed on sterling earlier in the year.
- UK inflation ticked up to 2.9% in July from 2.6% in June, and a survey of UK business activity released last week pointed to a pickup in growth in August. Together, this could keep the Bank of England cautious about cutting rates in the near term, which, if it continues, would generally be supportive for sterling relative to currencies where rates are expected to fall further. There are no major UK economic data releases scheduled this week, so sterling’s direction against the euro is more likely to be driven by events in the United States than by anything closer to home this week. The Bank of England’s next rate decision is not due until 17 September.
- 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 has weakened against the euro over the past month, down by around 2.7%. Two things are behind this. First, business activity across the eurozone has been picking up, with a notable improvement in German manufacturing. Second, the dollar has been broadly softer after the US Treasury increased the size of its bond buyback programme, which pushed down long-term US borrowing costs and reduced some of the appeal of holding dollars.
- This week brings two big moments for the dollar. On Wednesday, the second estimate of US economic growth for the second quarter is published alongside the Federal Reserve’s preferred measure of inflation. Then on Friday, new Federal Reserve Chair Kevin Warsh delivers his first major speech since taking the role, at the Fed’s annual conference in Jackson Hole. Markets currently see only around a one in three chance of a US interest rate rise in September, so any shift in his tone could move the dollar significantly in either direction.
- It’s also worth remembering that 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 the underlying story points the other way.
Pound to US dollar:
- Sterling has also gained ground against the dollar, up by around 1% over the past week alone, adding to a broader move higher across the summer as the dollar has softened generally. This has more to do with dollar weakness than any fresh change of view on sterling specifically.
- The same US events apply here. If Wednesday’s growth and inflation data, or Friday’s Jackson Hole speech, make a US interest rate rise in September look more likely, that would tend to support the dollar and could pull back some of sterling’s recent gains. If they point the other way, sterling’s advance against the dollar could continue, though as ever this isn’t something anyone can predict with certainty.
What to watch this week:
Monday 24 August:
- The US Treasury is expected to set out new measures targeting Iran’s economy, following weeks of disruption to oil shipments through the Strait of Hormuz. Any escalation could add to volatility in oil prices, which feeds through to inflation and currency markets.
Wednesday 26 August:
- Second estimate of US economic growth for the second quarter, alongside the Federal Reserve’s preferred inflation measure. Together these will shape expectations heading into Friday’s speech.
Friday 28 August:
- Federal Reserve Chair Kevin Warsh delivers his first Jackson Hole speech since taking the role. This is likely to be the single biggest market event of the week for the dollar, and in turn for all three currency pairs covered here.
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.
