If your business carries exposure across sterling, euros or dollars, June was an active month. All three shifted on the back of Middle East instability, softening eurozone growth
Businesses managing currency exposure across sterling, euros or dollars faced uncertainty in June as the situation in the Middle East continued to undermine growth and weigh on investor sentiment. An interim peace agreement between Iran and the US has now been signed, though the situation remains tense. The dollar benefitted from a confluence of factors in June and we expect dollar strength to continue in July amid the possibility of diverging monetary policies on either side of the Atlantic.
What happened in June?
- The dollar continued its positive run, gaining ground against both the euro and the pound. The dollar rose by over 2% against the euro in June, and by approximately 1.5% against the pound.
- The euro was hit by broad dollar strength amid continued uncertainty around the situation in the Middle East and weak economic indicators. Private sector activity notably slowed in Germany, the EU’s largest economy.
- The pound also struggled, falling to a near seven-month low against the dollar. UK economic data painted an inconsistent picture, and sterling was also undermined by continuing political uncertainty after Prime Minister Keir Starmer announced plans to resign.
For businesses buying from the US, the strengthening dollar could add to input costs. For those with European operations, a weakening euro could reduce the value of overseas revenues. June was a fairly volatile month on the currency markets and the signs are that July could follow a similar pattern.
What’s in store in July?
The pound
Conflict in the Middle East has eased as a driver of exchange rate fluctuation after the implementation of a peace agreement between the US and Iran. But the situation remains uncertain, and any hint that the Strait of Hormuz might be closed again would quickly impact money markets. The pound often suffers during periods of geopolitical uncertainty as investors look to what they perceive as more stable currencies.
The Bank of England (BoE) held interest rates steady at 3.75% in June for the fourth month in a row. The next meeting is at the end of July, with most economists currently expecting a similar outcome.
The continuing saga over the Labour Party leadership – and who will become next Prime Minister – may impact the pound this month. Former Greater Manchester Mayor Andy Burnham could be installed in 10 Downing Street within weeks, and markets will be watching closely for evidence of his likely economic approach.
The euro
The European Central Bank (ECB) raised interest rates by 25bps in June in line with expectations. But there is now some doubt over the future direction of travel after ECB President Lagarde appeared to downplay the likelihood of further hikes in the short term. Largarde believes that inflationary pressures will ease in Europe after the reopening of the Strait of Hormuz, but markets may punish the euro if conflict returns to disrupt shipping flows in the region. Europe is heavily dependent on oil shipped through the Strait.
July is likely to see the euro continuing to struggle against the dollar, thanks to both the strength of the US currency and weakening economic data in the eurozone. The gap between the growth trajectory of the two economies is also hampering the euro. These drivers are likely to continue to subdue the euro through July and perhaps beyond.
For UK and eurozone businesses that trade with the US, the weakness of home currencies against the dollar creates uncertainty. Importing businesses could see operational cost rise. On the flipside, exporting businesses may see demand grow alongside profit margins as goods become more affordable to US buyers.
The dollar
The dollar’s strong June showing is likely to continue through July. That may be aided by continuing uncertainty in the Middle East, despite a fragile peace deal.
The dollar is also being buoyed by more hawkish sentiment emerging from the Federal Reserve (Fed). Markets have raised expectations of interest rate rises later this year amid growing inflationary pressure and labour market resilience. Certainly, new Fed Chair Kevin Warsh seems to be resisting any behind-the-scenes pressure from the White House to prematurely cut rates, and higher rates make the dollar more attractive to investors.
Alongside an economy that continues to outperform European counterparts, these drivers are likely to see another strong showing for the dollar in July. Volatility could enter the market if the US peace agreement with Iran collapses or inflation figures surprise on the upside.
The takeaway?
Interest rates are likely to remain on hold across all three economies in July, and most economists expect economic fundamentals to remain largely in line with June equivalents. With that in mind, we expect some money market volatility, with the broader picture remaining one of dollar strength as the euro and pound continue to struggle.
