The pound rises but this is not necessarily because of sterling strength !

GBP EUR Exchange Rate: The Week Ahead July 24th

Pound Sterling Forecast remains Mixed

Yesterday saw a raft of good news pieces which helped to bolster the pound. Yesterday the IMF upgraded its global growth forecasts 2.8% to 3.0%.

This has benefited sterling as typically the UK does well when the global outlook is more positive.

The IMF expects the UK economy to grow by 0.4pc this year, this is a big upgrade compared with the 0.3pc contraction it predicted in April.

As well as the IMF upgrade, EY has upgraded its UK economic growth forecast for this year to 0.4 per cent.

This was from the 0.2 per cent previously estimated, on the back of signs of greater resilience.

Today’s key piece of news is the FED decision this evening at 7PM

It is highly likely we will have a hike of 25 bps, with markets split as to likelihood of a September hike or not.

This is the discrepancy that could be the trigger of volatility, depending on what Jerome Powell and team indicate.

US PMI in July came in at 52 — above the 50 mark that indicates economic expansion. This was lower than June’s reading and weaker than economists had forecast, which makes a September hike a little less likely.

As we mentioned Monday US Inflation is 3% and dropping naturally, the FED need to be very careful they don’t overkill on IR and cause unnecessary economic troubles.

According to some estimates the full effects of interest rate hikes can take 1-2 years to be felt, so the idea is to allow more time for Inflation to drop naturally owing to the hikes we have already had.

Sentiment before the Fed decision tonight could wane between the different outcomes and this is where we might see some volatility towards the end of the day, overnight and tomorrow.

The US dollar accounts for about 60% of globally traded foreign exchange and is used to price up all sorts of different financial instruments globally.

So, this decision has lots of potential to trigger moves on not just the US dollar but also other safe haven currencies, the commodity currencies, riskier emerging market currencies and stocks and shares.

Will the Euro be weaker ahead?

Sticking with the theme of interest rates, we have the Eurozone interest rate decision and policy statements tomorrow.

The ECB are expected to lift their base rate 25 bps tomorrow – although this week’s data is raising serious question marks about the prospect of further hikes for the time being.

The Euro is much weaker this week with EURUSD dropping to 1.10 and GBPEUR in the mid 1.16s, following EZ PMI a shocker, coming in at 48.9.

That is the composite ‘overall’ number blending Manufacturing, Services and Construction. Manufacturing alone was 42.7…

A key point to raise when looking at EZ and EURO is GERMANY –showing signs of economic weakness.

Germany is the 4th largest economy in the world, after US, China, Japan…. Importantly the biggest in the eurozone.

The German composite number came in at 48.3 – this is particularly bad because it was projected to be over 50 – which as we know represents expansion.

We also had the IFO index, a closely watched indicator of Germany’s economic health, fall yesterday for a third consecutive month to 87.3 in July from 88.6 in June, falling more than expected.

This is one of the key reasons the Euro is weaker this week, for the last few weeks a September hike was highly likely, this prospect has now been scaled back.

EZ inflation is running at 5.5% so still work to do – but just like the FED and the Bank of England, it is a delicate balancing act.

We can expect some serious questions for the ECB tomorrow in the Monetary Policy Statement after the decision, which is where we typically see volatility and movement from these events.

Just looking at the pound…

Whilst the PMI number Monday missed expectations, it still came in above 50 representing growth, and certainly when we compare to the Eurozone, was a much better figure.

UK PMI Composite was 50.7 compared to Eurozone 48.9, which helps explain the Euro weakness and GBPEUR Rise we have seen since Monday.

We have mentioned the IMF and EY upgraded forecasts, but still many challenges remain.

Manufacturing hit a seven-month low of 46.5, indicating that a majority of businesses were reporting a contraction. This brought the composite index, which combines the two sectors, to a seven-month low of 50.7, down from 52.8 in June.

Looking to next week’s key UK interest rate decision August 3rd, nearly 70pc of economists expect the Bank of England to raise interest rates by a quarter of a percentage point to 5.25pc at the next Monetary Policy Committee meeting on August 3.

The terminal rate now is expected to be a peak of 5.75pc, which could see the pound rising depending on how markets approach the hikes.

Next week’s Interest Rate Decision is key for sterling so sterling exchange rates look likely to be dictated by the FED tonight and ECB tomorrow.

OTHER currency news and topics

Chinese stimulus, as we outlined Monday, the Chinese did mention some policy adjustments this week which has seen the riskier currencies like the AUSSIE and Kiwi stronger.

The Chinese government are still targeting growth of 5% this year and might need these measures to get there.

This topic looks likely to be ongoing and is a key driver of shorter-term sentiment on the commodity currencies.

The reason the government is not launching a massive round of stimulus is to prevent the accruing of too much debt.

We also have the continued fall out of the Spanish elections – where we have a hung parliament and negotiations could take many weeks between the Conservative Peoples Party and the current PM Pedro Sanchez’s Socialists. The continued uncertainty here is a potential factor affecting the Euro.

Thank you for reading and please contact us to learn more about all the latest news and factors to be aware of with the pound.