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GBP, AUD, EUR, USD, CHF, JPY Exchange Rate Forecast

18 September 2017 by News Desk

Read all about last week's exchange rate movements and what could be in store for the week ahead, courtesy of currency specialists, FC Exchange.

GBP  – Pound rallies as investors prepare for higher interest rates

Last week

The pound was on a roll last week marking itself as the best-performing currency major so far this month after investors gained firm signals a UK rate hike could soon be on the way. As the week started, investors began to anticipate a more hawkish tone from the Bank of England (BoE) in its monetary policy meeting. Additionally, inflation rose above forecasts to 2.9% which added pressure to the central bank for higher interest rates. However, in the middle of the week sterling had a slight stumble in its rally, retreating from the one-year high against the US dollar (GBP/USD) it had achieved after UK wage growth data came in below forecasts. Slow wage growth has been a problem since the Global Financial Crisis (GFC) and as inflation soars, the squeeze on households is becoming more pronounced. Meanwhile, in positive news, UK unemployment levels hit a fresh 42-year low at 4.3%.

The Social Market Foundation’s (SMF’s) chief economist Scott Corfe commented: ‘After adjusting for inflation, workers are significantly worse off than they were a year ago. In part this reflects the increase in the cost of living as a weak currency has pushed up the price of imported goods. But it also reflects weak earnings growth which remains stubbornly stuck in the doldrums. Improving productivity to boost pay is absolutely critical.’

However, the BoE signalled in its minutes that ‘some withdrawal of monetary stimulus is likely to be appropriate over coming months.’ Friday followed with Gertjan Vlieghe—an external member of the Monetary Policy Committee (MPC)—suggesting that interest rates could increase ‘as early as in the coming months.’ This sent the pound soaring to reach its highest level since the days after the Brexit referendum, breaching the 1.36 level versus the US dollar (GBP/USD).

Week ahead

The week ahead has a smattering of medium-tier data scheduled for release with a few low-tier ecostats as well. Probably one of the most influential developments will be BoE Governor Mark Carney’s speech at the International Monetary Fund (IMF) in Washington DC. Any hawkish comments from the BoE Chief are likely to create ripples in the market and send the pound higher.

 

EUR – EUR/GBP parity speculation subsides

Last week

In recent months, there has been plenty of speculation as to whether the pound could reach parity with the euro, but last week the EUR/GBP exchange rate took a heavy beating as the British currency rallied. Some have suggested that if GBP/EUR retains gains and remains above 1.11, parity fears may be eased for some time. The euro has risen significantly against other majors this year, largely buoyed by robust economic data and hopes that the European Central Bank (ECB) will soon begin tapering its large stimulus package. In December, the euro to US dollar (EUR/USD) exchange rate was trending at $1.05, and now resides in the region of $1.20. However, exports have been a key component of the Eurozone’s economic recovery and fears that a strong euro could damage exports and create a kink in the ECB’s plans to taper its quantitative easing programme, are becoming more prominent.

In terms of economic data, Eurozone industrial production rose by 3.2% in July on the year, up from June’s 2.8% reading.

Week ahead

The week ahead might prove to be a little more exciting for Eurozone domestic data with the release of the German and Eurozone ZEW economic surveys on Tuesday. These high-tier data releases can cause significant movement in the single currency, and therefore markets will be watching closely. Thursday could also be another interesting day for the euro with the release of the European Central Bank’s Economic Bulletin and Eurozone consumer confidence ecostat. Friday will close the week with a raft of purchasing managers’ indexes (PMIs) for both Germany and the Eurozone, covering manufacturing, services, and composite readings. Any word from the central bank about tapering the massive quantitative easing programme in place could also bode well for the euro exchange rate.

 

USD – Analyst suggests long-term USD outlook impacted by Trump

Last week

The US saw inflation reach a seven-month high last week just ahead of the next Federal Reserve interest rate meeting, causing many investors to wonder whether higher interest rates could be on their way. Headline inflation was bolstered by higher costs of housing and petrol prices. The inflation rate rose from 1.7% to 1.9% on the year in August, while the core reading held steady at 1.7%.

Meanwhile, renowned Swiss analyst and author Marc Faber gave his two cents on the US dollar’s strength, suggesting that although the buck has had a tough year, there is still the possibility of a rebound short-term, but blamed politics for his pessimistic long-term outlook.

Faber commented: ‘I think the dollar could easily rebound by 4-5% or maybe even more. Longer term, I’m obviously not optimistic about the US dollar. You just have to look at the US administration and their economic policies that will not be very conducive for dollar strength in the long run. They’re actually shooting themselves in their own feet, so long term I’m obviously negative about the US dollar.’

Additionally, the US retail sales number failed to inspire investors when it unexpectedly dropped by -0.2% in August. Forecasts had suggested growth would be meagre at 0.1%, but still show expansion. The annual figure dropped from 3.5% to 3.2%.

Week ahead

It looks set to be a rather lacklustre week for the US dollar in terms of ecostats with just medium-tier data due to make its way onto the scene. However, the main event will be the Federal Open Market Committee’s (FOMC’s) interest rate decision due to take place on Wednesday. It is likely investors will pay particularly close attention to this decision as initial forecasts had suggested another interest rate rise could take place this year.  As core inflation has recently firmed, economists at Goldman Sachs have suggested that there could be a third rate hike on the way, pricing it in at 60% likelihood.

 

AUD – Strengthening labour market raises hopes of higher rates

The Aussie dollar continued strengthening in the market last week but with geopolitical tensions heating up, there’s some doubt as to whether the commodity currency will maintain its gains. The situation in North Korea seems to be continually unfolding and therefore any possibility of conflict could see investors favour safe-haven assets and leave the Australian dollar behind.

Meanwhile, the Australian economy showed the unemployment rate remained stable in August at 5.6% with over 54,000 Australians entering the workforce; Westpac’s consumer confidence also rose to 97.9 in September. The strengthening labour market has given investors hope that the Reserve Bank of Australia (RBA) will hike rates in the year ahead.

 

CHF – SNB holds rates, franc softens versus euro

The Swiss franc fell last week after the Swiss National Bank (SNB) opted to keep rates on hold and voiced a softer tone when it came to the safe-haven currency’s strength. The central bank said the franc continues to be ‘highly valued’ and said once again that it was willing to ‘intervene in the foreign exchange market as necessary.’  Before, it had referred to the franc as being ‘significantly overvalued.’ On Thursday, the Swiss currency fell by around 0.35% versus the euro (CHF/EUR), making its total decline this year to around 6.9%.

 

JPY – Yen becomes less attractive as Japan remains in North Korea’s sights

The yen had a poor end to the week as the US dollar climbed against it and the British pound surged, despite tensions in North Korea and a terrorist attack in London. The US dollar had felt the impact of North Korean worries early in Friday’s session after North Korea fired a ballistic missile over Japan. In times of geopolitical tensions the yen is often a safe-haven currency for investors, but as Japan now seems to be a target as North Korea ramps up its nuclear testing, there’s concern as to whether investors are as keen to buy the yen.

Disclaimer: This economic update is provided by FC Exchange a Global Reach Group Company, industry leaders in foreign exchange. Authorised affiliates are permitted to reuse content.

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