Doom and Gloom on the Currency Markets

Everywhere we look at the moment the news seems to be bad for the various major currencies. A slowdown in the global economy, with even well performing countries like the UK starting to see GDP growth drop off, is causing a general feeling of negativity to come flowing back into the markets.

In Europe there is talk of another recession. Germany, so long the support structure the whole bloc was built on, is producing negative data with regularity these days, and Mario Draghi is facing a constant struggle to come up with ideas and policies for the ECB to try and keep a handle on the Eurozone as a whole and more specifically the Euro. A weaker Euro is at some level seen as a UK-positive as it will encourage exports, but a confident central bank guiding a growing economy is much more important and that is what is eluding them at present. We often talk about the movement of investments out of low yielding and riskier positions leading to currency weakness – in the Euro’s case there has been a removal of €187.7billion in the last six months, which is evidence enough of the market’s overwhelming concern and the reason the Euro has weakened so significantly.

In the UK things are not looking too bad, with data still coming out reasonably positively, but there is a definite slow down. The Chancellor; George Osbourne, recently warned that a European slowdown would inevitably damage the UK’s growth, and this is already proving to be the case, with GDP last week showing a drop off in the speed of economic expansion. The biggest question in the UK is as usual when will we see interest rate rises – next year is likely the answer, but will it be Spring or will it be Summer? With inflation low we are starting to see policy makers – most notably the BoE’s Deputy Governor Jon Cunliffe – saying that interest rates can afford to stay low longer term and that stimulus packages currently in place will likely last longer. This is almost certainly bad news for the Pound, albeit maybe a slightly longer term problem.

US Dollar Rates on the turn

The US economy has been performing well in the last few months, perfectly illustrated by the Dollar’s dramatic strengthening against all the majors – more than ten cents against both the Pound and the Euro. However data has started to buck the trend and poor figures have become the norm again. Today’s Fed policy statement is expected to announce an end to its bond purchase programme, but is also expected to tell us that interest rates are going to stay low in the US, as in the UK, for longer than previously expected. As with the UK this is likely to cause some Dollar weakness, especially if the Fed are any more definitive with regards to timing, improving rates for sending money to the USA.

So the picture is definitely more bleak than we have had for some time. Will Draghi come up with any new ideas? Who will win the ‘race’ to raise interest rates between the UK and the US? Will today’s UK mortgage approval figures or German bond auction cause volatility?

No one knows the answers for sure, but here at Currency Index our experienced account managers can help to keep you informed and give you an idea of what to expect to allow you to make the most of your upcoming currency requirement.