Game of Thrones is well and truly back on screens and The White House communications team and former Chief of Staff have undergone their own version of the Red Wedding. North Korea has launched yet another ICBM, giving it a theoretical reach across to the US mainland and Trump responds with some strongly worded Tweets, expressing further displeasure with China’s inaction. Russia has given the US notice on expelling three quarters of US diplomats, in apparent retaliation to the US Senate’s overwhelming approval for a bill to toughen sanctions on Russia (for allegedly meddling in the 2016 US presidential election and for its annexation of Crimea in 2014). Please don’t forget that in December last year, then US President Barack Obama ordered the expulsion of 35 Russian diplomats and closed two embassy summer houses in Washington that were said to have been used by Moscow for espionage.
All of the above comes under the shadow of the Republicans failing to repeal or replace the Affordable Care Act (Obama Care) which continues to raise concerns and further weakens USD value. Its all getting a bit Tom Clancy and something of a consensus has emerged in the currency markets to sell USD.
In the UK, Preliminary GDP remained unchanged at 0.3%, matching the estimate. Over in the US, Advance GDP posted a strong gain in 2.6% in the second quarter, above the estimate. The headlines here are political risk continuing to rise, in no small part due to Trump’s failure to pass a healthcare bill weighed on the US dollar. The US dollar is under pressure, with mixed numbers in Q2 and worries that the Fed might not raise rates in December. Cable also moved to a 10-month-high above 1.31 but it is important to note that the recent trend has been mostly down to USD weakness rather than GBP strength. There is still strong probability that GBPUSD will fall back below 1.30 this year, especially if the Tory Cabinet “Civil War” starts to look any more messy.
Clients with USD requirements might wish to take advantage of the recent moves by securing funds with a series of spot and forward contracts.
GBP/USD movement can be seen on the graph below:
Brexit worries continue to darken the mood of investors for GBP, as the start of negotiations between the UK and the EU has revealed wide gaps between the two sides and significant internal differences and infighting within the government but also especially Mrs May’s cabinet. None the less, Euro lost some ground following the release of PMI figures all missing expectations but still the UK economy is slowing due to exchange costs driving the cost of imports higher and the squeeze of inflation taking its toll. It all points towards the BoE not increasing interest rates this week. None the less, the BoE will publish its latest quarterly inflation report on Thursday. Any downward revisions to growth will not help GBP value next week.
Clients selling GBP may want to hedge downside risks by securing funds on spot or forward contracts before Thursday morning.
GBP/EUR movement can be seen on the graph below:
The Fed kept the interest rate unchanged at 1-1.25% and USD was sold off immediately after the event and continued to decline during the Asia session. EURUSD reached close to 1.1780 last week, the highest level since January 2015. The pair opened this week above 1.17. Further support for EUR comes from the divergence in policy from the Federal Reserve and the European Central Bank for the time being, as market chatter over the likeliness of ECB ‘tapering’ in the coming months seems to have replaced the possibility of further tightening by the Fed.
The US releases Non Farm Payrolls (NFP jobs report) on Friday, crucial for USD relative value. Markets are expecting 187,000 new jobs in July. If NFP figures disappoint it is likely to lead to further USD currency losses. Average earnings will be closely monitored as the inflation level has been affected by recent sluggish wage growth. If wages don’t increase by at least 0.3% we will likely see USD drop at the end of the week, ongoing through to next. Follow the ISM manufacturing and non-manufacturing PMIs this week as good indicators of job growth and therefore the likely direction of travel for USD.
Euro movement against the Dollar can be seen on the graph below:
Not trading your currency is still a risk. The markets will move, volatility and relative values will vary but whatever your foreign currency exchange and international payment needs, you can rely on the team here at Aston Currency Management. Please do not hesitate to get in touch with us, we look forward to hearing from you. Now, if you will excuse me, winter is coming. Have a great week.
Written by Damien Lipman