Weekly Currency Brief – 10Jan-17Jan 2018

Weekly Currency Brief – 10Jan-17Jan 2018

As you were

In early January it looked as though the US dollar might be in for a new-year recovery after spending 2017 on the skids. Ah, how long ago that seems now. It all turned to dust last Thursday, not because of any new fault of the dollar but as a result of a document from Frankfurt that spelled out what investors had been suspecting for a while.

Half a month into 2018 it seems that this year could well bring more of the same for the US currency. From its position on new year’s eve the dollar has fallen by an average of nearly 2% against the other dozen most actively-traded currencies. It losses include three and a quarter cents to sterling and more than three cents to the euro.

Managing expectations

When the European Central Bank published the “accounts” of its last monetary policy discussion (a précised version of what other central banks refer to as the “minutes) it included a significant sentence: “It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.”

Investors were in no doubt what this meant. The ECB is preparing to prepare investors to be prepared for a hardening of monetary policy. First – they assume – it will take a knife to its monthly purchases of bonds and other financial assets, currently running at €30bn a month. Then it will begin to take interest rates higher, perhaps as soon as next year.

Yes, investors are reading rather a lot into what, on the face of it, is an anodyne statement about what, anyway, has only been “suggested”. But read it they did, and the euro pushed through the technical resistance that had been holding it back, touching a four-year high against the dollar.

Elastic pound

In the absence of other factors, when the euro rises or falls against the dollar it takes sterling with it. There is a degree of elasticity to the relationship: the euro moves first, leaving the pound behind, then the tightening elastic hauls the pound back into line. This happened at the end of last week.

And sterling is not being hampered by the Brexit situation in the way it was earlier last year. The recent message has been that all concerned – even the Brexit secretary himself – are trying to steer the country towards what has come to be known as a “soft” Brexit. Continued membership of the single market and customs union appears to be on the cards and investors like that.

The good news
The press have been trumpeting that sterling is at its highest level against the dollar since the EU referendum a year and a half ago. And so it is.

The bad news
That “highest level” is still 7% lower than it was on the eve of the vote, and the pound is an average of 10% lower against the other major currencies.
Sarah, Senior Account Manager at Moneycorp

Moneycorp is one of the largest international payment companies supporting over 90 currencies. Last year Moneycorp traded over £22.6 billion worth of international money transfers. Find out how Moneycorp can help you with your international transfer here.

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