The pound has continued its impressive run in 2022 this week, with the interbank rate topping 1.20 at 1.2018 against the Euro and 1.90 against the Australian dollar in yesterday’s trading. It was a slightly different story against the US dollar however with levels dropping to the 1.33’s, with the interbank rate lows of 1.3357, a one-month low and the lowest point of this year.
This variation in strength is explained by the rising of the US dollar as investors expect the United States will be raising interest rates in March. The US dollar accounts for 60% of globally traded FX and when rising yesterday, it has dragged the Euro and Australian dollar down.
Whilst the dollar is stronger against the pound too, the expectation is that the UK will also be raising interest rates in the future, so this has helped the pound to maintain a strong performance against other currencies.
Events of the last 48 hours just show the importance of keeping in close contact with us since the general trajectory of sterling had been less positive this week as investors eagerly await the final news of the Sue Gray report relating to Boris Johnson and the Downing Street parties.
Sterling has also suffered as investors become concerned over the outlook over Ukraine where the prospect of war and being drawn into conflict has the market slightly troubled.
Sterling is in the main higher in 2022 because of increased interest rate expectations, with predictions the Bank of England will be raising interest rates in February, on the 3rd next Thursday.
At December’s meeting, the Bank of England raised the base interest rate and sterling did find itself stronger against the Euro. Whilst there are predictions the pound could rise again, we know from history that where an event looks likely, the market reaction can be muted.
Sterling continues to trade strongly against many currencies, if you have a currency exchange to consider ahead, please do speak to us to learn more about the latest forecasts and news to move rates and forthcoming events that might influence your levels.
Will the Euro Strengthen in the Future?
The Euro has continued to be on the weaker side in 2022, dropping to fresh lows against both the US dollar and sterling. This is not so much because of anything particularly bad regarding the Eurozone, but more that investors are viewing sterling and the US dollar in a much more positive light.
This largely boils down to the expectation that the US and UK will continue to raise interest rates in 2022, with the UK predicted to next week, and the US expected to in March. Meanwhile, the European Central bank, the central bank of the eurozone is not predicted to raise interest rates until 2023.
Raising interest rates makes a currency stronger because it makes it more attractive for investors to hold that currency by paying out greater interest and laying a path to be stronger in the future.
Another reason for the Euro to be weaker, and the reason the ECB are not rushing to raise rates is their economic performance. Raising interest rates can stifle economic growth and with many countries in the Eurozone having placed lockdown restrictions during the Omicron wave, economic growth is predicted to be lower than for the UK and US.
Goldman Sachs the investment bank, sees Eurozone economic growth for 2022 at 3.9%, whilst the UK is predicted by them to be at 4.8% growth and the US 4.3%. And the OECD (Organisation for Economic Cooperation and Development), has repeatedly warned that countries reliant on tourism will be some of the last to recover fully from the pandemic.
The worries in the market are therefore that the Eurozone will not keep up with the pace of predicted economic strength elsewhere and investors are therefore trading Euros for pounds and dollars.
News today will be the latest German GDP and Eurozone Consumer Confidence figures. The Eurozone is not performing too badly and should still grow solidly according to the predictions, as it too bounces back from COVID.
The gulf however between the Euro and its peers does remain so if you wish to look at any trades regarding the Euro, speak to our team today about the latest news and events to move the market in the future.
When will the US Dollar Weaken?
The US dollar has been a very strong performer this week, with the US Federal Reserve the American central bank raising expectations that they will be looking to raise interest rates, with predictions this could be as early as March.
The next step in the economic cycle for the United States is one that leads to them raising interest rates which may have the effect of strengthening the US dollar. Typically speaking, the raising of interest rates does lead to a stronger currency and so it has been the case this week.
US inflation has hit 7% lately, which is the highest level since 1982 and is a key factor for the United States ‘Fed’ to be considering the interest rate hike.
The dollar has risen to its strongest against sterling since December and its strongest in 2022 hitting the mid 1.33’s. Against the Euro it is an equally positive picture for the American currency with EURUSD levels at their lowest since May 2020 at 1.1140.
The predictions for the US dollar could turn more positive ahead if there is increased expectations of further interest rates hikes.
Inflation of 7% is a real worry for a central bank and the Fed is under pressure to manage the economic expansion without any negative impacts on citizens’ standard of living creating further problems.
In terms of economic data today, there is some lower-tier wage and income data releases but nothing of too much significance to move the market. Of course, we never quite know what is around the corner but the general performance of the dollar, being much stronger would in theory continue, depending on how the news comes out.
For more information on the US dollar and what lies ahead in 2022, please get in touch with our expert team to discuss further.
This blog post is intended to provide This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).