Increasing growth drives interest rate expectations

27 October, 2017

Tom Arnold

Growth and Interest Rates in Focus

At the start of this week, there were four main announcements that the markets were watching and waiting for. So far, we have had two of them – UK GDP and the ECB policy statement. There has been much speculation about another – who will lead the Federal Reserve, and the last comes out in a few hours – US GDP.

UK GDP surprised the markets with the forecast prior to the announcement, actually being beaten, with UK growth up to 0.4% in the last quarter. The Pound took much strength from this, with many analysts increasing the chances of a UK interest rate rise next week to over 80% as a result of this rise. Increasing interest rates lead to a strengthening currency, as it makes that currency more attractive to investors searching for yields. Rates jumped up by a cent against both the Euro and the Dollar in the hours after the announcement.

The ECB policy statement likewise caused some surprise with the expected tapering of QE, which is Euro positive, coming in the form of a reduction from €60bn per month to only €30bn per month. But, critically, an extension of the overall scheme by an additional nine months, which rather negates any of the positivity the Euro could have gained from the drop in volume. As a result, the Euro lost ground against its major rivals – over half a cent against the already buoyant Pound and a cent against the Dollar.

The US Federal Reserve chair decision is yet to come, but the feeling is that Trump will likely look to replace the very dovish (interest rate cautious) Janet Yellen with someone more to his liking, which could cause a more hawkish (interest rate aggressive) tone to be prevalent at the top of the Fed. The US has already embarked on interest rate rises, but a fairly circumspect approach is being taken. Could a new chair, coupled with a positive GDP figure later today lead to a more aggressive, Dollar positive, approach? The Dollar is already in the driving seat; pushing both the Euro and the Pound back, as it takes control of the major currency seesaw – could it go further?

Where does this leave you?


The result of all of this is that Euro buying rates are up to the best levels we have seen since the end of September, which is great for those of your looking to buy Euros for your upcoming property completion in Europe. But for those with a Dollar requirement, rates have taken a tumble by almost two cents in as many days. Not forgetting we still have the uncertainty of ongoing Brexit negotiations to contend with; so the Pound is still vulnerable. Could the Euro highs be short-lived, could the Dollar gain even more momentum?

What is for certain is that the Pound is not about to embark on a massive recovery, so whether you are happy with the Euro rate or disappointed with the Dollar rate, this is likely the perfect time to consider locking in your rate using a Currency Index forward contract – speak to one of our brokers today to find out how you can lock the uncertainty out of your upcoming requirement.