21 Sep 2017 ·

GBP/EUR, GBP/USD rocket as BoE hints at interest rate hike

Currency Chart September 2017

As well as speculation regarding the monetary policy outlooks for the UK, US and Eurozone, there has also been the threat of nuclear war and some extreme weather for the currency markets to react to. The past month has seen GBP/EUR slide to an eight-year low of €1.1217, but has now spiked to an eight-week high of €1.1221. GBP/USD has bounced from a low of US$1.2786 mid-August to a one-year high of US$1.3338. EUR/USD climbed from US$1.1893 to US$1.2087, although it has now fallen to trade around US$1.1893.

What's been happening?

The pound dropped to an eight-year low against the euro towards the end of August, as nervous investors bought the safe EUR following another missile test from North Korea. The euro also climbed higher on the building expectations that the European Central Bank (ECB) will discuss in depth the tapering of the enormous quantitative easing programme in the October meeting. Further support for the euro came from ECB President Mario Draghi, after he claimed that the strength of EUR exchange rates was not something the central bank was planning to target as part of its monetary policy. The GBP/USD exchange rate was able to hit a one-year high this week after the latest UK inflation data. Price growth shot up to 2.9% - a joint four-year high – while core growth rose to a six-year high of 2.7%. The latest strong data saw bets of a rate hike from the Bank of England (BoE) shoot up. The US dollar continued to struggle with the softening odds of another interest rate hike from the Federal Reserve this year, as well as much resurgence in the tensions between the United States and North Korea. On top of this, the US also had to bear the brunt of Hurricane Irma, which many feared would cause severe damage to the US economy and take a chunk out of GDP this quarter. USD was able to somewhat bounce back this week, however, as Irma struck with less force than was expected. Data has been largely disappointing over the past four weeks – in particularly the labour data for August.

What do you need to look out for?

The minutes of the latest BoE meeting claimed that monetary policy 'could need to be tightened by a somewhat greater extent over the forecast period than current market expectations'. If UK data holds steady or improves, expect the pound to shoot higher as market hopes of a rate hike climb. Brace for worsening GBP exchange rates if the economy shows signs of weakening further. Markets are expecting the ECB to make plans to taper its quantitative easing programme at the end of October, so any suggestions this will happen will push the euro higher. Meanwhile, the US dollar will continue to fluctuate based upon tensions surrounding North Korea.

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