Currency Note

Pound loses out to resurgent dollar

By Alex Bennett July 28th, 2023

Despite dropping ahead of the European Central Bank’s (ECB’s) interest rate decision, the pound ended Thursday largely unchanged against the euro. It is around 0.75% up on the start of the week and slightly ahead of this time last month.

Against the US dollar, sterling lost our heavily yesterday following strong GDP figures from the US which revealed their economy expanded an annualised 2.4% in the second quarter of 2023, accelerating from the previous quarter’s 2% when it had been expected to moderate back to 1.8%. This was largely fuelled by a surge in business investment and consumer spending.

The ECB raised interest rates by 25 basis points to 4.25% in July, marking their ninth consecutive rate hike since last June and the highest borrowing costs for 22 years.

We have heard this morning, on the other hand, that the Bank of Japan is holding rates at 0.1%.

US stocks were all up yesterday as investors absorbed fresh GDP data and corporate earnings figures. The Dow Jones added a whopping 100 points, increasing for a record-breaking 14th consecutive session.

As for economic data, next week economists will hear eurozone inflation rates, US employment data and Germany’s balance of trade. However, the spotlight remains on the Bank of England, which is forecast to raise interest rates by 25-basis points to 5.25% on Wednesday.

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GBP: Dire session for sterling

The pound dropped between 1% and 2% against the US and Canadian dollars, yuan and yen yesterday.

One cause of that, on a day when there was no major UK data, appears to be comments from ECB chief Christine Lagarde that the interest rate hiking cycle may be coming to an end. This comes just before the Bank of England makes its own interest rate decision on Thursday.

Despite losing significantly against the US dollar yesterday following strong GDP data from the US, the pound remains around 0.50% stronger than this time last month against the greenback. It’s also up against the euro, just.

Other than the interest rate decision, there is little data next week from the UK side, but plenty from elsewhere.

GBP/USD past year

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EUR: Lagarde’s equivocation sinks euro

The single currency lost out against most major currencies yesterday following “marginally doveish” comments from the ECB president Christine Lagarde yesterday, even after they raised interest rates to their highest level in Europe for 22 years.

Before that, Spanish unemployment was revealed to have fallen to its lowest level since 2008, with 365,000 people finding jobs.

This morning we have had encouraging news on the eurozone’s economy, with France’s GDP leaping ahead by 0.5% in the second quarter of the year while its inflation rate fell to an annualised 4.3%. On the hand, Spain’s inflation rate rose, and its core inflation is still at a worrying 6.2%.

Germany’s economy has just been shown to still be slow, with Q2 GDP flatlining when there had been expectations of modest growth. Their inflation data will be released later today.

Back to yesterday’s interest rate decision, while in their comments the ECB committed yesterday to a “data-dependent approach” to future rate decisions and returning inflation to its 2% target, president Christine Lagarde raised the possibility of a pause in interest rates next month: “There is the possibility of a hike [next time]. There is the possibility of a pause. It’s a decisive maybe.” This sent the single currency into a tailspin against the US dollar, losing over 1%.

USD: American GDP and durable goods orders impress

The US dollar surged upwards yesterday following excellent economic data. In one day it gained around 1.5% against the pound and euro and almost double that against the Australian dollar.

New orders for US manufactured durable goods increased 4.7% in June 2023, the largest month-on-month expansion since the immediate post-pandemic boom in July 2020. This was boosted by transportation equipment which surged by 12.1%.

Quarterly GDP accelerated to an annualised 2.4%, far above market expectations of 1.8%. Will that feel-good factor find its way to shoppers? We’ll hear personal spending data later today.

Next week the labour market will be back in the spotlight with JOLTS job openings and non-farm payrolls.

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