Weekly Currency Brief – 27th Jul – 2nd Aug 2016

Weekly Currency Brief – 27th Jul – 2nd Aug 2016
Currency market statistics

Panic fatigue
In the week following the referendum vote to leave the European Union sterling sank by an average of -9% against the other dozen most actively-traded currencies. Investors marked it down because of a genuine fear that departure from the EU would harm Britain’s economy. Although there has indeed been statistical evidence since then to give weight to that worry, the sky has not fallen in and for all practical purposes Britain is no closer to Brexit today than it was at the end of June. Following their initial panic reaction investors have been much less gung-ho about selling the pound, not least because the prime minister has said the exit procedure will not even begin until next year. In the last week the pound’s downward progress has been more of a drift than a plummet. A one-cent loss to the euro has been balanced by a three-quarter-cent gain against the US dollar.

The good news
Britain’s economy expanded by 0.6% in the second quarter of 2016. It grew by twice as much as the euro zone and the United States.

The bad news
The second quarter ended on 30 June, six days after the referendum result became known. Data compiled since then paint a rather less rosy picture of the UK economy. Most recently the purchasing managers’ index (PMI) reading indicated a slowdown in manufacturing activity, with falling production and orders raising the spectre of job losses.

Bank Rate
Although the Bank of England’s Monetary Policy Committee held back from cutting interest rates in July analysts are in general agreement that it will do the deed when it meets this Thursday. Even though the difference between a Bank Rate of 0.5% and one of 0.25% would be invisible to most people, the sense is that the MPC will want to be seen to be “doing something” to avert recession. It would be reasonable to expect such a rate cut to exert further downward pressure on sterling but its effect should be mitigated by the widespread expectation that it will happen.
Exchange rate movement after brexit

Federal Funds Rate
Of course, rate expectations have a habit of being unmet, not least in the United States. When the Federal Reserve raised its benchmark Funds rate last December it was assumed that further increases would be forthcoming. But investors are still waiting, and they will probably have longer to wait if last week’s US economic data are anything to go by. As already noted, the US economy expanded by just 0.3% in the second quarter, growing by no more than the allegedly struggling euro zone. Investors saw the figure as killing any chance of a rate increase in September and hopes are not high for the other two opportunities this year in November and December.

Dollar drags
As expectations of higher US rates evaporated the dollar fell to the back of the field. Jointly with the Australian dollar (which was also hurt by a central bank rate cut) it was the week’s feeblest major currency.

Euro plods on
There can be little doubt that the European Central Bank would like to see its currency weaken. It has done just about everything it can possibly do – with negative deposit rates and asset purchases using newly minted money – to lift inflation to its 2% target and a weak euro would help that effort. But the euro refuses to lie down and it strengthened by a cent and three quarters against the dollar over the last week.

Coming up
The two events to watch on this week’s calendar are Thursday’s announcement by the Bank of England and Friday’s US employment report, which should shed more light on the outlook for dollar interest rates. Both will have an impact on their respective currencies, whatever they deliver.
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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