Exchange Rate Forecast

Exchange rate forecasts and foreign currency news

Bank of England to drive Sterling exchange rates

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This week the Bank of England are set to release their latest interest rate decision and quarterly inflation report. The general consensus seems to be for no change to interest rates and inflation to remain around the 3% mark, although recent forecasts from the Bank of England have suggested inflation could fall back below 3% throughout 2018.

Following the data releases Governor of the Bank of England Mark Carney will address the public and give his own outlook of the economy. Regular readers will be aware this speech has the potential to cause major exchange rate movement.

In recent months UK economic data has impressed with GDP and wage growth numbers showing an improvement. If the Governor reflects on the positive economic releases and suggests there are more to come, I expect the Pound could recover some of the losses we have seen from earlier in the week.

Michel Barnier’s warning on UK/EU trade

However, a topic that Mark Carney may have to address, which could put pressure on the Pound once more, is the ongoing Brexit negotiations. Head EU negotiator Michel Barnier issued a warning yesterday to the UK, suggesting the UK will face ‘unavoidable barriers’ if they decide to leave the customs union and single market. The reality is the UK cannot expect to trade with Europe for free but not abide by EU rulings and this is the sticking point for EU negotiators. I wouldn’t be surprised to see Mark Carney reiterate that Brexit negotiations will continue to drive UK monetary policy, which in turn will put the brakes on any substantial Sterling strength.

US stock market saw its sharpest decline in 6 years

In other news strong US employment numbers on Friday have triggered a major sell off in stock markets globally. Yesterday the US stock market saw its sharpest decline in 6 years, as investors sold off their investments and re-entered the US Dollar in anticipation that US interest rates will be hiked in March. GBP/USD exchange rates have dropped 3 cents and EUR/USD rates have also slipped by 1.5 cents since the data release on Friday. Unfortunately for the Pound the Euro is seen as a safer bet at present compared to Sterling therefore the Pound has also dropped 1 cent against the Euro following the news.

President Donald Trump’s State of the Union Speech

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The focus is back on the US this week, with a raft of key economic data releases, along with President Trump’s State of Union address on Tuesday at 9pm EST. We also have current Fed Chairlady Janet Yellen’s last speech before she steps down and hands the reigns over to Federal Governor Jay Powell.

The key to both events is likely to be tone. President Donald Trump’s speech is likely to be more inspiring than his speech to the World Economic Forum in Davos last week. Last week’s comments helped to strengthen the Dollar in what was a pretty diabolical week overall for US dollar exchange rates.

The Dollar has gained against most of its counterparts in anticipation of a powerful speech, where key topics such as the US economy, investment and immigration are expected to be discussed.

Key week for US Data

There are also a number of key economic data releases that could also affect the US Dollar’s value. Today’s personal income growth figures showed a positive increase and finished the year on a high and will eventually help Americans to keep up with the cost of living. This will likely boost expectations that the American economy and consumers can survive 3 further rate hikes this year and will likely feed into Dollar strength.

On Wednesday, the interest rate decision and subsequent monetary policy meeting is set to take place. Currently the chances of an interest rate hike are almost 0% at this month’s meeting and focus will be turned to the minutes for guidance on future developments. I would expect this event to be a relative non-mover for USD exchange rates unless something drastic takes place. The Dollar’s strength today is a sign the markets aren’t expecting much to happen.

The first Friday of the month brings with it a new set of payroll data to provide an insight into the strength of the US economy. The markets move on rumours and this month’s release is expected to show an increase of around 180k for the previous month, and for unemployment to remain largely unchanged. If this figure deviates from what is expected, expect some fireworks for the end of the week.

Non-Farm payroll data released tomorrow

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One of the most significant data releases in the calendar will arrive tomorrow when the US release their latest job creation data. The Non-farm payroll data release is the number of new US jobs created that month outside of the agricultural industry. This data is considered as one of the main indicators for the health of the US economy, with big numbers strengthening the US Dollar and low readings doing the opposite. There is always a prediction from analysts but so often the expectation and the reality are a long way from each other, which can create major volatility.

Along with Non-farm payroll data there will also be Unemployment data for September, however there isn’t expected to be any change from the last 4.4% reading. Average hourly earnings are expected to also remain the same so I wouldn’t be surprised if there was a strengthening for the US Dollar.

US Federal Reserve speeches yesterday

Yesterday Janet Yellen and several other members of the Federal Open Market Committee spoke. There was optimism of an interest rate hike coming at the end of the year and it’s likely it will start to be priced into the US Dollar, which could drive the GBP/USD rate down to 1.30.

Theresa May says she will remain as Prime Minister

Prime Minister Theresa May today released a statement suggesting she will not resign and is planning to stay on. After a difficult speech yesterday at the end of the Conservative party conference there were whispers that Mrs May should step down. The release today did however cause Sterling to drop as Theresa May is a known to be an advocate of a hard Brexit. If Mrs May was to resign and a new Prime Minister appointed, they may choose to move away from the idea of a hard Brexit. That may create optimism for the currency market, providing Sterling with a welcome boost.

The US Dollar starts the week in focus after rebound

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The Dollar found itself in high demand last week, performance wise it was the best week for the US Dollar so far this year.

A combination of a hawkish speech from Janet Yellen reinforcing a December interest rate hike in the US, pushing up the probability of a rate hike before the end of the year to around 70% according to polls. The other factor contributing to Dollar strength at present are President Trump’s tax plans. The projected boost from the proposed tax cuts have caused a surge of investors to buy government based US bonds, which has in turn strengthened the Dollar.

US economic data in focus this week

Following hawkish comments from Fed Chair Janet Yellen, the markets are keenly watching this week’s data releases from the US.

This afternoon’s ISM manufacturing index was much better than expected and shook off any fears that the two devastating hurricanes, Irma and Harvey would cause a disruption to these figures. The data pointed out that there is no shortage of manufacturing activity just yet. There is no shortage of data releases this week so this could be a volatile trading week for those with interest in the US Dollar. However, the ISM data today has helped to ease investors’ fears that the US jobs data would be heavily impacted by the two hurricanes. This could be confirmed with US Jobs data due on Friday.

On Wednesday afternoon, we get a raft of data including Services PMI and EIA Crude Oil Stocks change. This is then followed by a speech from Janet Yellen during the evening (UK time).

Non-Farm Payroll data due on Friday

As we head towards the end of the week Non-Farm Payroll data in the United States will be of great importance for anyone with a Dollar requirement or indeed the need to exchange any of the perceived ‘riskier’ currencies, such as the Australian Dollar, New Zealand Dollar and South African Rand. This is due to be released at 13:30pm on Friday.

With a host of Federal Reserve members speaking this week, any further hints to US policy could send the US Dollar surging even further.

On a separate note, all of the team here would like to extend their thoughts and prayers to anyone affected by the horrible scenes witnessed in Las Vegas today.

US Dollar rates – Hurricane Harvey, North Korea and Trump

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The economy seems to be performing well in the US, with unemployment down and Gross Domestic Product (GDP) data showing healthy gains. However, today the latest inflation data does not seem to reflect the current growth in the US and as such creates a problem for the Federal Reserve and could influence the decision on when to raise interest rates. At present, the likelihood of a rate hike before the end of the year in the US is between 30 – 40 percent.

Currently the US Dollar seems to be holding steady, despite a large number of factors that could easily cause Dollar weakness at any given moment. President Trump has recently vowed to shut down the Government if Congress failed to vote on lifting the debt ceiling and to finance a wall with Mexico. This would most likely cause the US to fall out of favor with investors. Currently, Hurricane Harvey is likely to take the spotlight as Congress and the Government address the issues caused by the natural disaster.

President Trump also has the capability of moving the Dollar through his tweets, which yesterday caused investor sentiment to shake as he tweeted ‘it’s time to stop talking with N.Korea!’

So, whilst the US data of late has been extremely positive (retail sales, consumer confidence and GDP all beating expectations), external factors are likely to heavily weigh on the Dollar in the short term and for this reason I can’t see the Dollar gaining much more value against the Pound and the Euro.

Tomorrow’s payroll data for the US is likely to paint an even better picture of the US economy, so keep your eyes peeled as to whether this will improve the chances of a rate hike before the end of the year.

A mixed bag of data for the US economy

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The US private sector hit a 27 month high in August, adding to optimism that the US economy could still on course to raise interest rates, according to a preliminary report published by Markit this afternoon. The figure in their services sector report was a considerable jumped up from the previous month and out performed initial expectations. The services sector makes up 80% of the US economy so this figure was a welcomed sign that the US economy is on the right track.

In what was a tale of two halves, the Purchasing Managers Index data that was released at the same time dropped below analysts’ expectations. Many analysts are claiming that the stronger Dollar of recent times has weighed on Manufacturing sector, hitting exports and increasing costs for imported goods.

Overall, the data released today was taken as a positive on the whole by investors. A well performing services sector means that Gross Domestic Product (GDP) is expected to pick up in the 3rd quarter for the US and could help add to the case for the FED to raise the US interest rate before the end of the year.

What next for the US Dollar?

Looking ahead to the rest of this week there are a few economic releases of note to keep an eye out for, namely Initial Jobless Claims and Continuing Jobless Claims data tomorrow afternoon and Durable Goods Orders for July on Friday.

Jackson Hole Symposium starts tomorrow

Tomorrow is the start of the Jackson Hole Symposium, where key figures from central banks will meet. There is usually exchange rate movement around announcements and speeches that give hints to any future monetary policy. Look out for the Federal Reserve’s Chairlady, Janet Yellen who will be speaking on Friday at 17:00pm (BST). If you have an interest in USD/EUR rates, Mario Draghi (President of the European Central Bank) will be speaking at 20:00 (BST), which could cause some volatility.

Euro goes from strength to strength

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The euro has received a fresh boost today. A report issued yesterday by Danske Bank had revised predictions for the Euro following a ‘perfect set of conditions’, both political and economic that have allowed the Euro to go from strength to strength, what is more is that the report has identified further strength for the Euro in the months to come.

Euro makes strides against GBP and USD

The Euro has recently made massive strides against the GBP and the USD. The UK’s current economic situation following a downgraded growth report from the IMF this week and worse than expected GDP figures today have done little to inspire investor confidence in the Pound. As a result, I think it will be matter of time before the GBP/EUR rate drops below 1.10.

The Euro has recently surged against the USD too. The US Dollar is facing its own struggles at the moment. The controversy caused by the ongoing investigation into possible collusion between Trump and the Kremlin at the time of the Presidential campaign. This has been the main driver for the USD weakness, however the Euro shouldn’t be underplayed. Downside risks to the Euro have seemingly disappeared. As all eyes turn to the German elections in September, it is now anticipated that the German Prime Minister Angela Merkel will come out unscathed. Recent events in the French elections seem to have put the anti-establishment feel in the Eurozone out for now.

What’s next for the Euro?

The question now is can the Euro sustain such growth and will the Euro bite back at some point? Credit Suisse have brought an interesting point to the table, the recent rally in the Euro’s strength will impact on Eurozone exporters’ profits, with firms such as Volkswagen and other automakers likely to be heavily impacted.

Euro weakened by dovish sentiment from ECB

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The Euro weakened yesterday allowing those buying Euros a short reprieve. This unexpected tumble followed comments by Ignazio Visco, Governor of the Bank of Italy and a member of the ECB’s Governing Council.

Mr Visco stated that Eurozone monetary stimulus policies should remain expansive. Essentially these dovish comments are an indication that the ECB intends to keep interest rates at low levels, and the rate of asset purchases high in the short-term.

Analysts do not expect the ECB to raise interest rates or adjust stimulus measures until the target inflation rate of 2% is close.

EUR/GBP Outlook

If sentiment from the ECB continues in this dovish fashion the result is likely to be further Euro weakness. With markets currently pouncing on every scrap of news, it is near to impossible to predict which way the GBP/EUR rates will go.

Although the markets have turned their attention more towards economic data and the likelihood of interest rate hikes, news about Brexit can drop at any time, hitting the exchange rate, causing movement either way.

With little UK or EU data expected for the end of the week and Bastille Day on Friday in France, there are only a few EUR related releases that could impact rates, the most notable of these being Eurozone Trade Balance figures which are due at 11:00am BST on Friday. These numbers are expected to show an increase to €20.3B, so a significant difference could cause some movement. The other minor announcements are Italian Trade Balance numbers and CPI data, neither are expected to cause significant volatility.

EUR/USD Outlook

As discussed, there is little data of note due for the Euro until next week. However, this is not the case for the US Dollar. Janet Yellen, Chairlady of the US FED is still testifying to Congress today, explaining the current US economic situation. Following this, tomorrow we have a raft of data due for the US. The most notable of these are month-on-month Retail Sales of June, due at 1:30pm BST. This is expected to be positive. Released at the same time there are some year-on-year Consumer Price Index (CPI) releases, also for June. With expectations of 1.7% year-on-year expect any deviations from this figure to result in currency fluctuations.

It’s worth keeping an eye on these as any deviation from the expected could affect the EUR/USD rate.

Following these is Industrial Production data which is expected to be positive.

US Interest Rate Decision Today

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This evening it is expected that the US Federal reserve will raise interest rates for the second time this year which will see the interest level move to 1.25%. The main driver for this was the announcement that the US Unemployment rate is at a 16 year low of 4.3%. Furthermore economic growth appears to have jumped up following a lacklustre first quarter.

This strong opinion regarding the US interest rate hike is held by many economists, and following FED members communications, the writings pretty much on the wall. However, there is always a significant margin for error with these things. The recent strength seen for the US Dollar has come of the back of the markets pricing in the potential hike. In my opinion the GBP/USD level could move even further toward the 1.25 mark if the rate hike happens. Previously the Federal Reserve have been dovish and can often demand the perfect economic conditions in order to raise rates. While the economic situation seems firm, the political scene is far from that.

Trump and Russia Scandal

President Donald Trump is at the centre of events in the Senate as the investigation into whether the relationship with Russia breaches the laws. Jeff Sessions who is the US Attorney General offered very little in regards to new information and if anything chose to share nothing. Quite the opposite from former FBI Director James Comey who seemed rather scathing and happy to insinuate Trump over stepped the mark.

Whilst it seems very hard to believe Trump will be pulled in front of a court at any point, one thing for sure is that controversy seems to follow. Over the next few days the US Dollar could move significantly either way.

US and China talks positive

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The meeting between the top two global superpowers has proven positive and looks as if trade talks are going ahead. Donald Trump and Chinese President Jinping have clearly managed to resolve any differences and look set to have a constructive relationship, which many thought could end up in a race to the bottom. China have offered some short term wins to the US by lifting bans on purchasing beef from America, there will also be more access to buying other agricultural products from the United States.

If the US and China do come to a trade agreement then the US Dollar could dramatically increase in strength. At the moment there is a considerable amount of tension between the two powers, but a deal could create enormous wealth. Currently they’re seen as competing with one another, however a deal could be beneficial for both.

“We have made tremendous progress in our relationship with China. The relationship developed by President Xi and myself I think is outstanding.”
– Donald Trump, President of the United States of America

It could be quiet week until Friday

There is not much pivotal data out for the US Dollar until the end of the week when it’s Good Friday. There is expected to be a fairly mixed bag of inflation data and retail sales information. Should there be any movements from the expected results then that could cause major market movement.

Any poor data could have a serious effect as there is an expectation that good data is needed to increase the changes of further interest rate hikes. Therefore, should the data be poor the market strength for the US Dollar could start to diminish and could even dramatically weaken.