September begins with currency markets in a more nervous mood. Sterling is still in a stronger place against the euro than it was for much of the past year, which remains useful if you are buying property in Spain, France, Portugal, Italy or elsewhere in the eurozone. But the easy part of that story has passed. The pound is now being pulled between stronger UK interest-rate expectations on one side and rising government borrowing costs on the other.
The euro has been pushed around by the same problem facing almost everyone: energy. Eurozone inflation rose again in August, largely because of higher energy prices, making next week’s European Central Bank decision much more interesting. The dollar, meanwhile, has regained some ground as investors return to safe-haven currencies and markets price in a greater chance of another US rate rise.
So, the September story is not simply “pound strong, euro weak” or “dollar up, pound down”. It is about debt costs, oil, inflation and central banks all fighting for the steering wheel. Lovely and calming, as ever.
For overseas buyers, the practical point is clear: a helpful exchange rate can still disappear quickly when bond markets, oil prices and central bankers start moving in the same week.
GBP: The pound still has support, but debt costs are biting
Sterling remains well placed against the euro compared with much of the past year, but the tone around the pound has become more cautious.
The support comes from interest-rate expectations. UK inflation rose in July, according to the Office for National Statistics, and markets are now looking closely at whether the Bank of England will need to stay hawkish for longer. Higher interest-rate expectations can support a currency because investors may receive better returns from holding it.
But there is a less comfortable side to the story. UK government borrowing costs have climbed sharply as part of a wider global bond sell-off. In plain English, investors are demanding higher returns to lend money to governments. That matters because higher debt costs can squeeze public finances, make the autumn Budget harder and raise questions about future tax rises or spending cuts.
The UK economy is still growing, but not racing. GDP increased in the second quarter, helped by services, while production was flat. That is steady enough to avoid panic, but not strong enough to make sterling bulletproof.
For euro buyers, the pound is still offering a better opportunity than at many points over the past year. The risk is that this support is no longer coming from a clean growth story. It is coming from sticky inflation and higher rate expectations, which can be helpful for the exchange rate but less comfortable for the wider economy.
In short: the pound still has something going for it, but the market is watching the small print.
GBP/EUR past year
EUR: Inflation is back in focus before the ECB
The euro has entered September with inflation back at the top of the agenda.
Eurozone inflation rose in August, according to Eurostat’s flash estimate, with energy prices doing much of the work. That matters because the European Central Bank meets next week and markets are now asking whether policymakers may need to raise rates again.
The ECB held rates at its July meeting, but it was already watching the energy shock closely. Since then, eurozone growth has looked a little firmer and inflation has moved higher. That combination gives the euro some support, because it makes a softer ECB stance harder to justify.
However, the euro is also vulnerable to higher energy prices. The eurozone imports a large amount of energy, so oil and gas shocks can hurt the economy even as they push inflation higher. That is a pretty unpleasant mix: prices rise, businesses feel pressure and the central bank has fewer easy choices.
Against the pound, the euro is still trading from a weaker position than earlier in the year. But the story is less one-sided than it was in July. If the ECB sounds hawkish next week, the euro could push back harder. If it sounds nervous about growth, sterling may keep the upper hand.
For buyers in France, Spain, Portugal or Italy, this is one to watch. The ECB decision may not change your plans, but it could change how far your pounds stretch.
EUR/USD past year
USD: The dollar gains as investors get nervous again
The US dollar has regained support as markets turn more cautious.
The dollar often benefits when investors are worried, and September has started with plenty for them to worry about: higher oil prices, rising bond yields, the continuing war in the Middle East and renewed questions over inflation. Recent market reporting showed the dollar climbing against a basket of currencies as traders increased bets that the Federal Reserve may raise rates at its September meeting.
The change in tone has been helped by Fed chair Kevin Warsh, who used his Jackson Hole speech to stress that inflation is still not under control. Markets took that as a sign that the Fed may be willing to act again if upcoming data points in the wrong direction.
There are still reasons for caution. The US labour market has been cooling, and the next jobs report will be watched closely. If hiring weakens sharply, the dollar could lose some support. But if inflation stays sticky and employment holds up, markets may decide the Fed has room to stay tough.
For anyone buying in the US, paying dollar fees or moving money back from America, the message is that the dollar is still capable of sharp moves. It is being driven by safety demand, Fed expectations and oil prices all at once.
USD/GBP past year
Debt costs, oil and central banks are driving the mood
The biggest change since last month is the return of bond-market stress.
Government borrowing costs have risen in the UK, US and eurozone as investors demand higher yields. That can affect currencies in different ways. Sometimes higher yields support a currency by attracting investors. But if yields rise because markets are worried about debt, inflation or political credibility, the effect can turn negative.
That is why sterling’s position is not as simple as “higher rates equal stronger pound”. Higher UK rate expectations may help against the euro, but rising gilt yields also make markets more nervous about the fiscal outlook before the autumn Budget.
Oil is the other major driver. Higher energy prices feed inflation worries and make central banks more cautious. They can support oil-linked currencies, but they also hurt importers and increase the cost pressure facing households and businesses.
The Bank of England, European Central Bank and Federal Reserve all face a similar problem this month: inflation has not gone quietly, but growth is not strong enough to make rate rises pain-free. Central banking is rarely a popularity contest, but September looks especially thankless.
What’s coming up: key events to watch
Looking ahead, several important economic events could influence exchange rates over the next few weeks:
- US ADP employment report – 2 September
- US ISM services PMI – 3 September
- US non-farm payrolls – 4 September
- Eurozone GDP third estimate – 5 September
- European Central Bank interest rate decision – 10 September
- UK GDP, trade and industrial production – 11 September
- US inflation – 11 September
- US consumer sentiment – 11 September
- UK labour-market data – 15 September
- US Federal Reserve interest rate decision – 16 September
- UK inflation – 16 September
- Eurozone industrial production – 16 September
- Eurozone final inflation figures – 17 September
- Bank of England interest rate decision – 17 September
- Eurozone flash PMI data – 23 September
- UK quarterly national accounts – 30 September
For the pound, the key tests are UK GDP, inflation and the Bank of England decision. Stronger growth would help, but higher inflation may not be entirely welcome if it raises borrowing costs and adds pressure before the Budget.
For the euro, next week’s ECB decision is the main event. Markets will want to know whether policymakers see the latest inflation rise as temporary energy noise or something that requires another rate rise.
For the dollar, US jobs and inflation come first, then the Federal Reserve. A firm jobs report and sticky inflation could keep the dollar supported. Softer data could take some heat out of the rate-rise story.
CAD: Oil keeps the Canadian dollar in play
The Canadian dollar is driven by oil prices, US demand and Bank of Canada rate expectations. As a commodity-linked currency, it can gain when energy prices rise or global risk appetite improves. Recently, higher oil prices have offered support, but CAD remains vulnerable if US growth worries return.
CHF: The franc still has safe-haven appeal
The Swiss franc is shaped by safe-haven demand, Swiss National Bank policy and global risk sentiment. It often strengthens when investors get nervous. Recently, CHF has had some support from geopolitical uncertainty and bond-market stress, although it can soften quickly when investors move back towards higher-yielding currencies.
NZD: The kiwi needs better global sentiment
The New Zealand dollar is sensitive to global risk appetite, dairy exports, China demand and Reserve Bank of New Zealand policy. It tends to do better when investors feel confident. Recently, NZD has struggled as stronger safe-haven demand and global growth worries have made risk-sensitive currencies less appealing.
JPY: The yen is trying to find support
The yen is driven by Bank of Japan policy, US-Japan rate gaps and safe-haven demand. It has struggled because Japanese rates remain low compared with the US, UK and other major economies. Recently, however, the yen has found some support from talk of another Bank of Japan rate rise and nervous global markets.
How to protect your own budget
A stronger pound against the euro can be genuinely useful if you are buying property overseas, but it only helps if the rate is still there when you need to transfer.
Exchange rates can move between offer and completion, between signing a contract and paying a deposit, or while your bank and solicitor are still working through checks. That is not exactly ideal when you are already trying to organise estate agents, notaries, tax numbers and paperwork in another language.
If you know you will need to exchange money in the coming weeks or months, speak to a currency specialist early. Smart Currency can help you understand your options, including forward contracts, which let you fix an exchange rate for a future transfer.
That can help protect your budget from adverse currency movements while you focus on the practical side of buying, selling or moving overseas.
Exchange rates can shift quickly – and when you’re moving large sums for a property purchase, that can mean thousands gained or lost. Speak to a currency specialist to discuss tools like forward contracts, which let you lock in an exchange rate for the future, shielding your budget from adverse movements.
