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Brexit and economic brooding weigh on Sterling

Published: Wednesday 15 August 2018

  • Euro clashes with Turkish Lira
  • Australian Dollar dips on gold prices and economic attitudes
  • US Dollar still strong – could this change anytime soon?
Both Brexit verbiage and economic data have battered the Pound this past week, as negotiations on the future of the UK-EU relationship continue in fits and starts and any negative comments fuel the fall of Sterling against its equally volatile currency partners.

Talk that the EU is considering a trade deal with the UK (despite murmurs of freedom of movement restrictions) offered hope that a Brexit deal is within the realms of possibility and that helped the Pound to strengthen against the Euro and against some other currencies. However, hard data now pushes Brexit speculation aside and takes centre stage.

UK inflation and employment figures stole the spotlight, bringing with them the typical seesaw of positive and negative economic news and the resulting yo-yo effect on Sterling strength; a feature of most data releases in these uncertain times.

UK unemployment is now 4.0%; the lowest for 30 years, but wage growth has not quite matched expectations. It was nonetheless a positive economic result for the UK. All eyes then turned to UK consumer price inflation. Headline inflation increased to 2.5% in July 2018, in line with forecasts and an improvement on 2.4% the previous month, with core inflation remaining at 1.9% year-on-year. A large contribution to rising UK inflation came from increasing transport costs and computer games prices. You could argue that computer games are rather a niche item to have in the inflation calculation basket and I would tend to agree.

The inflation results failed to support Sterling against the continually strong US Dollar, with the exchange rate hovering around the 1.275 level.

Euro clashes with Turkish Lira

The big news for the Euro this week has beenthe Turkish Lira, as its substantial collapse has caused major headaches; especially for European banks. Rhetoric from the Turkish central bank has done little to calm the currency markets. The Euro, like the Pound, has also been under pressure from the buoyant US Dollar and from disappointing economic data. However, the most recent German growth results and an apparent steadying of the Turkish Lira on Tuesday have helped the Euro bounce back a little.
word ``Australia`` on twenty dollar banknote

Australian Dollar dips on gold prices and economic attitudes

The Australian Dollar ended last week lower against the Pound following the Reserve Bank of Australia’s (RBA) Monetary Policy statement, which revealed lower inflation forecasts but a predicted boost in overall growth and employment. Signs that interest rate rises are still not on the cards for Australia weakened the Australian Dollar, despite helpful economic data from China;  Australia’s major trading partner. Australian interest rates remain at the same level that they have been for more than two years, and the RBA doesn’t seem to be planning a hike anytime soon.

The price of gold has also had an effect on the AUD this week. Although wage growth has improved and retail sales have increased, Australian consumer sentiment is down again and the falling price of gold affects Australian exports, so it has left the Australian Dollar with little support.

US Dollar still strong – could this change anytime soon?

The US Dollar remains strong in the run up to a raft of economic releases that could shed further light on the strength of the US economy. However, most of the current USD strength against other major currencies comes from international political uncertainty and a bold approach to monetary policy from the US central bank, the Federal Reserve. Trade tariffs imposed by both sides in the ‘trade wars’ have served to strengthen the US Dollar as investors look to protect their funds by turning to the relative safe haven of the USD. Oil prices are also falling in the face of a strong US Dollar, worrying global investors in a time of uncertain economic and trading relationships. The future of the North American Free Trade Agreement (NAFTA) is also a continued concern, particularly for North American neighbour, Canada.
What to watch

The key features for the week ahead are the next round of Brexit negotiations starting Thursday 16th August and the cut and thrust of the battles between the US and China, Turkey, Europe and the Mexico/Canada partnership battling to get a NAFTA agreement finalised with America.  There is also a slew of economic data to keep the markets busy and there is always the Trump Twitter Twaddle to fill in the gaps.
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