The Pound slumped versus the major currencies* yesterday, what can we expect from the currency market in the week ahead?
The UK Parliament voted to overturn amendments made in the House of Lords to the legislation allowing Theresa May to invoke Article 50* earlier this week. This has caused the Pound to tumble as investors retreated from the unstable British currency. The next two years of negotiations are likely to cause considerable waves on the markets, with rumours, hints and speculation all likely to rock exchange rates.
Losses against the Euro were somewhat curbed, however, due to the fact the Dutch elections are kicking off today. Investors are waiting to see how popular far-right Geert Wilders and his Party for Freedom (PVV) turn out to be. Although it is highly unlikely he will get into power – the Netherlands has a coalition government and all other parties have refused to join forces with the PVV – a strong showing of support would likely embolden anti-EU parties taking part in key elections in France and Germany later in the year.
The Pound is also weakening against the US Dollar, even though the ‘Greenback’ is struggling to find support. Markets are virtually certain the Federal Reserve will vote to increase interest rates today. Because investors have expected it for a while now, they have traded the US Dollar as though it has already received the boost from the decision. Ironically, this means it is actually weakening ahead of the meeting, as markets are selling the US Dollar to take profit on the Fed decision before it has even happened.
Pound (GBP) – Negative
Today’s wage growth figures could unsettle the Pound if they show a slowing pace of earnings growth. Inflation is likely to continue rising thanks to the weak Sterling exchange rates, so households will need to see strong income growth if they are to keep spending at the same level. The Bank of England meets tomorrow to set monetary policy; it is highly unlikely the Monetary Policy Committee (MPC)* will opt to raise interest rates, but there is a chance members will express further unease with the idea of letting inflation get much stronger before acting. Suggestions a rate hike could be on the cards for the near-term would boost the Pound and help it shake off some of the gloom that has descended ahead of the Article 50 trigger.
Euro (EUR) – Negative
The outcome of today’s Dutch elections could have a marked impact upon the Euro over the coming weeks. While the PVV has almost no chance of winning – unless it can win an astounding 76 seats on its own – strong support would indicate that populism continues to thrive in the Eurozone. This could be a serious threat to the future of the bloc, as the first part of French Presidential elections next month could put far-right candidate Marine Le Pen on the path to taking power and enacting her plans to withdraw France from the Eurozone. Indications this might happen will weaken the Euro, while a stronger US Dollar from higher US interest rates could further sap appetite for the common currency.
US Dollar (USD) – Positive
Markets may already be selling the US Dollar on the expectation of higher borrowing costs from the Fed this evening, but that doesn’t mean USD is likely to weaken for long. There is a possibility the Federal Open Market Committee (FOMC)* could increase their outlook on monetary policy, stating that they envision three more interest rate increases this year, rather than the current two markets expect. This would push the US Dollar higher. Even if the Fed doesn’t suggest this, investors will simply switch focus back to President Donald Trump, who may soon announce bold plans to reform the tax system and boost government spending to improve the economy. This would also be positive for the US Dollar, leaving many more factors to drive USD exchange rates higher than lower.
Australian Dollar (AUD) – Neutral
What direction the Federal Reserve takes today in its monetary policy outlook will be a big driver for the Australian Dollar. The prospect of more interest rate hikes will be negative for the Australian Dollar, although there is some important labour market data coming up which might help negate the impact of US developments. However, many analysts believe that a major source of AUD support – the strong prices of iron ore – could be set to wane soon. Experts are worried the strong recovery in prices for Australia’s key export is unsustainable and that the market could soon weaken. Any further signs of cracks appearing in iron ore demand or consumption could unseat the ‘Aussie’.
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Major Currencies: Pound Sterling, US Dollar, Euro, Australian Dollar, New Zealand Dollar, Canadian Dollar
Article 50: The official EU legislation governing how a member state leaves the Union.
Monetary Policy Committee (MPC): The official Bank of England team responsible for setting monetary policy, such as interest rates.
Federal Open Market Committee (FOMC): The official Federal Reserve team responsible for setting monetary policy, such as interest rates.