July Currency Update - Has the £ Hit its Peak?
The Pound
The result of the UK election was always a bit of a foregone conclusion but the positive reaction in the pounds value came as a bit of a surprise considering the uncertainty that a change of government can sometimes bring. However, the strong majority Labour now enjoys means they can press ahead with their fiscal plans without much resistance and it is this prospect of significant spending which allowed the pound to find some fresh support.
In the last 2 weeks we have seen the pound hit a 1 year high against the Dollar and a 2 year high against the Euro. Coming into this week it would appear this good run of form may have run its course with the Pound weakening against all bar the Aussie and NZ Dollars (for reasons we will come on to.) The recent UK Retail Sales report made for grim reading showing a contraction of 0.2% year-on-year. Couple that with the expected slow down in Average Earnings and it looks like the much debated August interest rate cut from the BoE is back on the table.
The EURO
The European Central Bank left interest rates steady as expected in July with President Lagarde suggesting the September decision was still 'wide open'. Markets are pricing in a further 2 cuts for 2024. The political stale mate in France sees no signs of improving as the left continue to struggle to find a viable candidate for prime minister following the recent inconclusive elections. Both these factors are likely to keep the Euro under pressure moving forward.
The Dollar
The Dollar has struggled in July as cooling inflation increased bets for a Federal Reserve interest rate cut in September but it’s the election news that has stolen the headlines following President Joe Biden’s decision to end his re-election bid and endorse Vice President Kamala Harris. Given the election isn’t till November there is ample time for further twists and turns although Trump is currently well in the lead while the Democrats scramble to endorse a new candidate.
Aussie & Kiwi Dollar
The Aussie and NZ Dollars have both struggled in a risk averse market triggered by the US election news and then exacerbated by China's unexpected move to cut several key interest rates. China surprised markets on Monday by cutting major short- and long-term interest rates in its first such broad move since last August to support its fragile economy. With China now the most important trading partner for both Australia and New Zealand they are very sensitive to this type of negative news.
Pound going forward
With the Pound still proving to be one of the best performing currencies this year we must remain vigilant of potential headwinds that could threaten the currency’s momentum. The BoE have a very difficult task balancing its monetary policy actions to tame inflation without unduly constraining economic growth. The next meeting is scheduled for 1st August and will be a big test for the pounds resolve. July Currency Update - Has the £ Hit its Peak?
The PathFinder Team
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