Foreign exchange market update

With the help of Moneycorp, lets take a look at this month’s market update with the recent political, economic & global news. Whats happened, how has the market reacted and what the future holds.

Big shock to markets in August already – What happened!?

• The month of August has started off with a big shock to global financial markets – the US Federal Reserve are likely to cut rates much quicker than previously thought, with something like 1.00 – 1.25% of cuts this year now on the cards to bring rates down to 4.25 – 4.50%.
• That is up significantly from the 0.50% cut priced in as recently at last Wednesday (31st July).
• This is the result of poor US jobs data – non-farm payrolls – and higher unemployment figures, leading to fears of a US recession building.
• Additionally, as I flagged last week, the Bank of Japan raised rates by 0.15% and the Bank of England cut rates by 0.25% last week, feeding into the overall market volatility globally.

What has been the market reaction?

• We have entered a “risk off” period due to the rapid change of interest rate expectations in the US, meaning everyone is taking their risky investments off the table.
• This means stock markets have fallen significantly since Thursday (1st August), with the S&P 500 down 6.8%, FTSE 100 down 3.1%, and the Japanese Nikkei 225 down almost 17% before recovering today.
• Usually in risk off periods, the US Dollar is the go-to investment as a safe-haven, however as this is driven by US interest rates the US dollar has also fallen between 1-2% against most other currencies and instead Euro, Swiss Franc and Japanese Yen have been bought, rapidly strengthening those currencies.

• GBPEUR is down 1.5% since Friday.
• EURUSD is up 1% since Friday but has been 2% up earlier.
• GBPCHF is down 2.6% since Friday.
• GBPJPY is down 3.3% since Friday.

What next?

• There are no major central bank meetings for the remainder of August, so the FX market will be reacting very quickly off the economic data releases, especially from the US.
• Next Wednesday 15th we will have both UK and US inflation data released. This will almost certainly be a volatile day for FX markets.
• UK GDP released on Thursday 15th – is the UK continuing its recovery?
• US GDP released on Thursday 29th – is the US really going into recession?
• EU CPI inflation on Friday 30th – will inflation still be under control dropping towards 2% in the EU?

Forecast Snapshot

Where do the banks think FX markets will be at the end of the year?

GBP/USD

• Current 1.27
• Barclays 1.31  (very bullish)
• UniCredit 1.26
• Wells Fargo 1.27
• BNP Paribas 1.27

GBP/EUR

• Current 1.16
• Barclays 1.23
• UniCredit 1.16
• Wells Fargo 1.19
• BNP Paribas 1.20

EUR/USD

• Current 1.09
• Barclays 1.06
• UniCredit 1.09
• Wells Fargo 1.07
• BNP Paribas 1.06

Source: Bloomberg Analytics

Please do get in touch if you have forthcoming FX requirements. Along with Moneycorp, I can explain how to reduce FX risk and/or make the most of the potential volatility coming up in August, depending on your risk appetite and timeline.