The pound has arguably its most important relationship against the US dollar, since the US dollar is the most heavily traded currency in the world. Therefore, any big movements on the US dollar are a key factor in driving sterling movements.
The weakness from the US dollar stems from the latest decision by the US Federal Reserve bank in the United States that they wish to look at adjusting their inflation targets. By allowing inflation rise higher than the usual 2% band within which the US central bank seek to keep inflation, there is the potential for looser monetary policy ahead.
With the Coronavirus having made a huge impact on many of our lives globally, the US central bank is concerned about the future direction of their economy and the consequences ahead for individuals.
With the US Federal Reserve indicating their looser stance ahead, there has been a weakening of the US dollar for two reasons. Number one, a looser monetary policy stance usually weakens a currency by making a currency less attractive to hold.
Secondly, the US dollar is a safe haven currency which means in times of uncertainty it can rise in value as investors buy US dollars to shield away from risk elsewhere. The flipside on this is that when there is certainty or optimism, the US dollar can weaken (like it has done this week and lately) as investors seek other more profitable assets elsewhere.
The weakness of the US dollar has caused GBPUSD to rise from an interbank low of 1.2310 back in 30th June, to this week’s high of 1.3349. This ten-cent rise is presenting an excellent fresh opportunity to buy US dollars with pounds.
Pound to Euro Interbank Rates Near Three-Month Highs, Where Next?
Sterling has finished the week testing a fresh high against the Euro with the interbank rate hitting 1.1221, a real milestone for the pound to Euro rate and its highest point since June 10th. The pound has been a beneficiary of some Euro weakness and most importantly US dollar weakness as described above for this leg up.
We can now look ahead to some of the upcoming events in September to determine just what the future prospects for this pairing might be. One of the key topics might well be Brexit, as investors look to end of the transitional phase deadline, we are approaching ever so closely each day.
The outlook for the pound to rise higher or lower could well be determined by the outcome from Brexit with investors linking the possibility of a deal with sterling strength, whilst the prospect of a no-deal seems to be linked closely to sterling weakness.
The market will continue to second guess what lies next, the outlook too for the Coronavirus will also play a crucial role in the pound as it continues to shape global attitudes to risk and sentiment. The recent US dollar weakness is a prime example of this, with the currency market reacting to the shift in policy from the US central bank.
Looking further ahead, investors might find other events to move the rates too, including the US elections. This can of course be directly linked to the outlook on the US dollar, and may well have a direct impact on the pound against the Euro and other currencies too.
Overall, the currency market is in for a busy end to the year which could see increased volatility as we learn of the outcomes from key events which we know from history can have real potential to move the rates.
Sterling has been a mixed pattern for many weeks, awaiting fresh news to drive it in one direction or the other. It will be interesting to see whether this latest move for the pound is genuinely the beginning of a new trend, or whether it is just a small spike based on global events, before other potentially more pressing events like Brexit come to forbearance.
The Coronavirus has made the currency markets even more unpredictable and volatile in many respects, and we can help share with you the latest news and provide tools to help provide you make an informed decision and strategy on your transfer.
If you have an upcoming currency transfer and would like to learn more about the factors influencing GBP, EUR or USD rates, please do contact me directly using the form below.