In the early hours of Wednesday morning, we saw Trump attack Jerome Powell yet again. In an interview with the Wall Street Journal, the former reality television star criticised the Federal Reserve for hiking interest rates. He said he was very unhappy with the Fed because Obama had zero interest rates, seemingly unaware that the US economy was in a very different place back then. A normalisation of monetary policy is certainly welcomed in some quarters and one of my colleagues made an interesting point when we were discussing the frequency of the Fed’s hikes a couple of weeks ago.
During the financial crisis, interest rates were slashed in an attempt to boost the economy. It follows then, that in order to be able to cut rates, they must be above zero and the further they are above zero, then the more room there is to stimulate the economy. If there was another financial crisis in the next couple of months, the Fed would be in a position to slash rates again. What would the European Central Bank do? Rates are already at 0% and, while they could begin aggressively buying bonds each month again, their room for manoeuvre is limited. That’s not to suggest hiking rates is the right way to go, but it’s an interesting point nonetheless.
Yesterday was a bad day for the eurozone, with business growth hitting its slowest rate for more than two years. In addition, optimism hit a four-year low this month in further signs that tariffs and trade wars are affecting economic demand. Germany, the eurozone’s largest economy, was hit particularly hard, as manufacturing PMI dropped to 52.3 in October from 53.7 in September and some way below the 53.4 the markets had been expecting.
The pound didn’t do too great either, hitting a new six-week low against the dollar. It won’t surprise you that the weakening was brought about through further Brexit anxiety. The fact is that Theresa May simply cannot reach an agreement on the UK’s transition deal. If the Prime Minister cannot even get her own cabinet to agree to her proposals, then she has virtually no chance of getting it through parliament. As it stands, a no-deal Brexit looks the most likely outcome.
Speaking of which, there have been reports that the public might have to start stockpiling drugs in the event of a no-deal Brexit. Martin Sawer, of the Healthcare Distributors Association, told MPs that the industry is ‘very concerned’ about a no-deal as it could have ‘catastrophic’ consequences for the supply of drugs. The government has instructed firms to stockpile a six-week supply of drugs.
Given the uncertainty of the future, making predictions about what the pound will be worth one year from now is a thankless task. The disparities between the GBP/EUR highs and lows the major banks are predicting amounts to 25 cents and, for GBP/USD, 31 cents.
In such a volatile climate, it’s crucial to use a forward contract to lock in one single exchange rate. That way, no matter how the market moves across 12 months, it won’t affect you at all. Speak to your Personal Trader on 020 7898 0541 to find out more.