Hello and welcome to our mid-year review
where I’ll be talking you through events in the currency markets so far in 2019.
My name is Brendon Hill and I’m a Currency Analyst at the Hargreaves
Lansdown Currency Service. So here’s a bit more detail on what we’ll go into. We’ll start by looking at some of the predictions from our Sterling Outlook
2019 Report – for those of you who haven’t seen this, it’s a report that we produce
every year normally in December. We survey a variety
of experts from around the investment industry and gather their thoughts on
what lies ahead in the coming year for currency markets then we’ll compare
their predictions to what’s actually taking place in the first six months of
the year before going into more detail on Sterling’s performance against the
euro and u.s. dollar specifically. Before we end we’ll take a look at what’s on
the horizon for the second half of the year to help you stay one step ahead. So
let’s dive into the predictions from the Sterling outlook report. This year’s
report gathered views from a number of experts on a wide range of foreign
exchange topics including their predictions for exchange rates. We asked
for their forecasts at the midpoint of 2019, so about now, and the end of the
year. Just for context they gave us their views towards the end of last year at a
time when the pound was trading at around 1.12 against the euro and
1.27 against the dollar. It was also a time where Theresa May was still
negotiating the first draft of the Withdrawal Bill and before it had properly
been debated and voted on in Parliament We asked what factors are likely to be
important global influences for foreign exchange markets and we asked
them to rate on a scale of one to five where one is not important and five
being very important. The most influential was expected to be the pace
of interest rate rises in the US. During 2018 the Federal Reserve had raised
interest rates four times and at the time markets were anticipating more
rises in 2019. But the Fed have changed their tune during the first half of this
year and the markets no longer expect any
further rises this year, Indeed Fed Chair Jerome Powell has indicated an openness
to cut rates if needed and Donald Trump has repeatedly expressed his desire for
lower interest rates in order to boost business growth, although the Federal
Reserve who decide on the interest rate policy is independent from the US
government, so don’t necessarily have to act on the
President’s wishes.The second most important global factor was thought to
be US trade policies and that has certainly been influential so far
despite trade talks continuing for months no deal has been reached at
the time of recording this in fact tariffs have actually increased between the USA
and China in the first half of this year. Further tariffs were threatened on
Mexican exports into the USA however this was averted at the 11th hour after
Mexico agreed to increase its national guard by 6000 heads to limit
illegal immigration to America. Aside from interest rates and growth and
inflation the possibility of signing a Brexit deal was seen as having the
biggest influence on the pound.This was followed closely by possibility of a UK
election or leadership challenge and they were right – Brexit developments have
been the key driver for the pound during 2019 far outweighing other factors such
as economic data. Political developments haven’t yet led to a UK election but
after Mrs May’s departure we are seeing a change in leader. So now on to their
predictions for exchange rates.Views were split on this but the most popular
expectation was for sterling / euro to be between 1.20 and 1.25 by mid-year. This turned out to be rather optimistic as the Sterling interbank rate is
trading at around 1.12 at the time of this recording although as I mentioned
much of Sterlings fortunes have been tied to brexit developments and many had
expected a resolution one way or another by March 29th, the original
deadline for leaving the EU. On the other hand they were more accurate on the
dollar with the consensus between 1.25 and 1.30 by mid-year. The market is
currently trading right in the middle of this range at around 1.27. Now we’ll look
at what’s actually happened and the easiest way to do this is by looking at
a graph of the Sterling / Euro exchange rate. As you can see from the graph,
Sterling had a very strong start to the year rising from 1.11 to around 1.15 and a half by the end of January. Much of this was
down to optimism that a Brexit deal would be reached as sterling rose
against many other global currencies. The pound peaked on the 18th of March
briefly hitting a high of 1.18, I know this isn’t shown on the graph you’re
looking at but that’s because the data for this graph shows the average daily
rate rather than the highs for each day. So the pound did briefly touch 1.18 but
dropped back later in the day The Sterling / Dollar chart is broadly
similar in pattern to the Euro chart although the drop during May was more
pronounced against the Dollar, that was against the Euro. This decline was a
combination of a lack of Brexit clarity and strong US economic figures. As we’ve
said the pound has been very sensitive to Brexit developments and it’s hard to
see that changing, having secured a couple of extensions the new date for
the UK to leave the EU is the 31st of October. Central bank policy on interest
rates will also drive currency markets in the coming months. Interest rates are
important to the currency markets – if interest rates rise it usually makes that
country more appealing to foreign investors. In order to invest they have
to buy the domestic currency so it usually strengthens as a result. So if
the Federal Reserve do indeed lower rates it could put pressure on the
dollar, on the other hand Mark Carney, Governor of the Bank of England, has said
that UK interest rates may rise quicker than markets predict if the economy
performs as expected, although it’s difficult to see them making any
changes before Brexit has been finalized. Over on the continent the
European Central Bank have implied that rates will not be increased until 2020. Any change to the status quo could see some volatility in exchange rates,
although there are of course no guarantees. Finally politics will
continue to have an effect. The UK is currently choosing a new prime minister
the result of which is likely to have an impact on Brexit negotiations one way
or another, and the United States will start gearing up for their election in
2020. So as I mentioned earlier I’m a Currency
Analyst at the Hargreaves Lansdown Currency Service – if you’re looking to
transfer currency overseas or indeed back to Sterling please do get in touch
on the number shown here or visit our website at www.hl.co.uk/currency