Joseph Wright
November 2, 2021

Could diplomatic rows put pressure on the Pound’s value?

The UK’s relationship with other nations is in the news at the moment, and those with an upcoming currency exchange to make involving the Pound should keep an eye on this, as it could impact Sterling exchange rates.

From a positive standpoint the UK is increasing its investments within emerging markets in regard to green energy at a time whereby climate change is prominent within the news.

Over the next 5-years the UK has pledged to more than double its current aid package in emerging countries, meaning that it will donate more than £3bn over the next 5-years over staggered payments. At the COP26 (2021 United Nations Climate Change Conference) Boris Johnson, the UK Prime Minster announced this initiative and stated that ‘no country should be left behind’. Of the £3bn the UK has pledged there will be a significant contribution towards India. According to Reuters there will be a sovereign guarantee for a $1bn World Bank loan to the country to aid its development in green infrastructure. Although this announcement is unlikely to move Sterling immediately, the significance placed on tackling the issues of climate change by world leaders could in the future impact economic output and currency values, so it’s worth monitoring.

From a negative standpoint the tensions between France and the UK don’t appear to be letting up anytime soon, with the language heating up between the two global leaders regarding several issues but especially fishing rights.

Over the weekend reports suggested that UK PM Johnson has suggested that Brussels reign in the French government regarding their rhetoric regarding the issue of fishing rights, and on Monday reports suggest that Britain has given France 48-hours to back down in the fishing row. Those of our readers following GBP/EUR should be aware that the issues could spiral into wider trade disputes as France has threatened to amend the existing Brexit trade agreements. If there are legal actions between the two, there could be an impact on currency values with the Pound potentially being especially vulnerable, as the currency isn’t part of a trading bloc like the Euro is for example.

Aside from the ongoing diplomatic tensions I think the Bank of England’s monetary policy update on Thursday could also offer the Pound direction, especially if comments regarding an interest hike from the BoE is touched on.

Will the Euro continue to weaken and what’s causing the losses?

Euro sellers have seen the single currency continue to lose value against most major currency pairs in recent weeks. On Friday the Euro dropped further when news broke that Eurozone inflation came out higher than expected and equalled its all-time highs. The issue for the European Central Bank (ECB) when deciding on monetary policy is how to counter the issue of increasing inflation levels but stagnating economic output levels.

The Euro has found itself in the news for the wrong reasons lately after hitting the lowest levels against the Pound in 20-months and the lowest levels in 14-months against the US Dollar. The Swiss Franc, which is a safe haven currency also hit a one-year high against the Euro over the past few trading days, and I think that further bearish tones from the ECB could push the Euro even lower.

There are also the diplomatic issues between France and the UK which could also negatively impact the Euros value. The potential downside in terms of currency value is greater for the Pound than the Euro as the Euro is part of a trading bloc, but if legal action is taken against France this could have a detrimental impact on the Euros value.

The likelihood of an interest rate hike from the ECB is low according to market expectations so it’s hard to see what could reverse the Euros fortunes in the near future.

Later today and tomorrow ECB member Elderson will be speaking and perhaps more crucially ECB leader Christine Lagarde will be speaking tomorrow, so these events are worth being aware of. Do feel free to get in touch if you wish to plan around them.

Could inflation concerns hit the US Dollar?

The US Dollar has been a major benefactor of global growth concerns lately due to its status as a safe-haven currency. Despite the Pound climbing against many major currency pairs over the past quarter, it has actually lost almost 2% against the US Dollar to put things into perspective, and the greenback has gained 2.5% against the Euro in this same time period.

There have been a lot of headlines regarding inflation levels over in the US recently due to the cost of living increasing quite dramatically. This issue isn’t a US specific concern as inflation levels are increasing globally but the Republican Party has been quick to highlight the increases since Joe Bidens Democratic party took control. Senate Minority Leader Mitch McConnell, who is the chambers top Republican mentioned the rising costs of living and inflation around 24 times during a 13-minute news conference last week so this is becoming a hot topic.

Over the past 4-months the US consumer price index has risen at over a 5% annual rate and Treasury Secretary Janet Yellen recently suggested that this will increase into next year.

The Fed Reserve Bank is likely to try and counter these issues so those of our readers with an upcoming currency requirement involving the US Dollar should pay attention to the FED’s comments during their monetary policy updates. The next updates will be on Wednesday at 6pm when the latest interest rate decision is due. No change from the current 0.25% is expected but any references to future policy changes could impact the US Dollar’s value. There are expectations that the FED will begin to taper its asset purchasing plan, so currency markets are likely to look out for any updates pertaining to this.

At the end of the week the Unemployment Rate and Non-Farm Payrolls will also be released as it’s the first Friday of the month, and these releases always carry the potential to influence the greenback’s value owing to their importance. Do get in touch if you wish to plan around these key releases.

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