Politics rather than economic fundamentals continue to drive movements in currency markets. Theresa May’s ‘renaissance’ speech in Florence renewed about as much interest as a UK savings account. Merkel’s election ‘victory’ has put European politics back in the headlines after a period of oh, 4 months of stability. At least we can count on Trump to pick a fight with the entire NFL and provide continuity to the world.

Sterling/Euro

Has the tide turned on Sterling/Euro? After Theresa May spoke on Friday Sterling came under some pressure. It was a very political speech in Florence - lots of words without actually saying anything. The UK then had its Credit rating downgraded by the rating agency Moody’s to Aa2 from Aa1. They reasoned that there would be challenging times ahead for public finances with Brexit, easing of austerity measures and slower growth in the coming years. We dipped under 1.13 after a week of gains for Sterling to largely settle around where we started. We then had the German election result on Sunday. The single currency was sold off overnight in the Asian session.

Is the Euro now on the back foot? EUR/USD has come off from levels above 1.20 to break through 1.19 this morning. We had IFO figures out of Germany today that saw manufacturers ramped up their investment. However, this fell short of expected figures hence the dip. Couple this with the German election result and the extreme right gaining more seats than expected and the Euro is under pressure. Are we in for sudden change in direction for GBP/EUR? Unlikely. We’ll likely see Sterling take a breather after its recent climb higher. We have a week of relatively light data releases although heavy on Central Bankers. The ECB are up today with Mario Draghi speaking. If you have a requirement to purchase Euro’s from Sterling it may be worthwhile locking in some at current SPOT rates. Remember, we were under 1.09 only a couple of weeks ago. Please contact the trading department for a rate of exchange.

Despite the German elections and the upcoming Italian elections I still see the Euro gaining further ground in Q4. I expect the ECB to commence tapering of QE as the economy is in a good enough position to warrant it. Sterling has gained disproportionately on the news that the UK will raise rates. You would expect the Bank of England Governor to follow through this time. If he doesn’t? Expect Sterling to come off quite substantially. Consumer debt is also rearing its head more and more each month and will be more of a news story in the coming months.

If you have a requirement to convert Euro’s into GBP I would expect further dips and us to trade back below 1.10 again. If you would like to implement market orders please contact me directly or the Trading department and we can look to ‘average up’ your rate of exchange through staggered market orders.

Sterling/Dollar

Cable (GBP/USD) hit the giddy heights of 1.36 in recent trade. If you are buyer of USD from GBP consider locking some in at current SPOT levels. We are around the best levels since last year. If you have capacity it may be worth covering off some USD on a 3 month Forward Contract that will see you out until the end of 2017. If you would like Forward Contract pricing please contact the trading department.

As detailed above I still see Sterling under pressure in Q4. I don’t see any miracle cure on the horizon that is going to change that. The Dollar is likely to strengthen further with a US rate hike due in December so I see Sterling/Dollar heading back towards the 1.30 mark. At the beginning of the year we forecasted GBP/USD to finish around 1.32 and I don’t think we’ll be far off that. Perhaps slightly lower.

We have the Federal Reserve Chairperson, Janet Yellen, speaking tomorrow that will give us further clues on the health of the US economy. The only data of note out from the US this week is GDP (Annualized) Q2 on Thursday.

I expect currencies to be largely range bound this week. Although, the term ‘range bound’ used to indicate tight price movements and a ‘range’ now can be anything from 0.5-1% price movements on an intraday basis. Central Bankers will likely dictate the direction of currencies this week.

Q4

Going into the last week of Q3 please do get in touch to start planning a strategy for the remainder of the year. G10 currencies are likely to continue to have large price movements so make sure you are protected from fluctuations by having a plan in place.

Any questions do get in touch.

Have a fantastic week.

Written by Liam Alexander