Strong Dollar and strong Pound lead the way

5 August, 2015

Tom Arnold

Having spent much of the last few months focused on what is happening in Greece, the recent agreement to a third bailout has given an opportunity for the markets to resume what you might call ‘normal service’, with economic data and central bank policy back to the fore.

The Greek situation hasn’t completely gone away and will remain a constant backdrop for at least months, if not years to come. As a result the Euro is likely to continue to be on the back foot until the Eurozone economy starts to catch up with the US and UK economies in terms of performance, stability and critically growth.

As a result of their significantly better situations the US and the UK are able to start focusing their monetary policies towards the future rather than simply fire-fighting the immediate problems. There is talk of imminent interest rate rises from both central banks, with the US expecting to lead the way with a rise as soon as September and the UK following with a slightly more conservative rise towards the back end of this year or maybe even into early next year.

For those of you with an upcoming currency purchase this likely means a strong Dollar and a strong Pound, with the Euro obviously expected to be the loser, as investors pile in to the other two majors to get higher yields. This is by no means a certainty as these interest rate hikes are widely expected and so are likely already priced in to some degree, but it does mean a close eye needs to be kept on any announcements from these central banks in the coming months.

Yesterday saw some particularly hawkish (interest rate hike positive) comments from Federal Reserve member Lockhart and Thursday will tell us this month’s Bank of England policy together with the MPC vote – if more than one or two of the members voted for an immediate rate hike, then indications will be that it might come sooner than the end of the year and the Pound will strengthen, but likewise if the vote is 9-0 in favour of the status quo then the Pound could easily lose some ground.

Today’s data is mainly focused on Markit services PMI with French, German, European, UK and US figures all due, together with European retail sales, US mortgage approvals and US employment numbers. So a busy day, although most eyes are still looking forward to Thursday for the Bank of England’s new look statement, press conference and vote release.

As ever stay in close contact with your CI account manager to be kept informed of exactly what is happening and how it is likely to impact your upcoming currency purchase.