Sterling’s strong July run against the euro has lost some of its shine, but remains some 1% up on last week and above the 1.17 against the euro. It’s weathered the start of the Burnham era (picture above Fred Duval / Shutterstock.com) and choice of chancellor, but has been coming under pressure.
Earlier this month, the pound pushed to its strongest level against the euro for a year. That was welcome news for anyone buying property, retiring or sending money to Spain, France, Portugal, Italy or elsewhere in the eurozone. When you are moving a deposit, paying legal fees or funding a completion, even a modest exchange-rate improvement can make a real difference to the sterling cost.
Today’s picture is more complicated. The pound has pulled back from its recent highs, with markets reacting to higher oil prices, rising government bond yields and fresh worries about the UK’s fiscal position. The euro has also found some support ahead of today’s European Central Bank decision, while the dollar has benefited from renewed demand for safety as the Middle East conflict pushes energy prices higher again.
So July has turned into two stories. The first is still a helpful one for euro buyers: sterling remains in a better place than it was for much of the past year. The second is a warning against assuming that a good rate will still be there when your solicitor finally asks you to transfer the money. Currency markets have been in a skittish mood, and frankly they do skittish rather well.
GBP: The pound gives up ground after its euro rally
Sterling’s best moment this month came against the euro, where it finally broke above the range that had held it back for much of the past year.
That move was helped by the gap between UK and eurozone interest-rate expectations. The Bank of England held Bank Rate in June, with most policymakers voting to keep policy unchanged and two voting for a rise. That split mattered because it told markets that the Bank was not ready to declare inflation beaten.
Since then, however, the sterling story has become more awkward. UK inflation fell in June, according to the Office for National Statistics, while the labour market showed signs of cooling. Payrolled employee numbers were down on the year and vacancies continued to fall. Those figures can ease pressure on the Bank of England to raise interest rates, which is not always helpful for the pound.
There is another layer too. Higher oil prices have pushed up inflation concerns globally and contributed to a rise in government bond yields. UK gilts have been caught in that move, with markets also watching the new government’s spending and tax choices. That combination has made sterling more vulnerable, even against a euro that has its own problems.
For euro buyers, the practical message is not “the opportunity has gone”. It is more like: “the easy part of the rally may be over.” If your budget improved earlier this month, it may be worth checking what that gain is worth to you before more data and central-bank decisions arrive.
GBP/EUR past year
EUR: The euro waits on the ECB
The euro has had a mixed July, but today’s focus is firmly on the European Central Bank.
Eurozone inflation fell in June, according to Eurostat, after rising in May. That gave the ECB a reason to pause and wait for more evidence before tightening again. Markets broadly expect the central bank to hold rates today, but the tone of Christine Lagarde’s press conference may matter as much as the decision itself.
If the ECB sounds relaxed about inflation, the euro could lose some support. If it sounds concerned about energy prices, wage pressures or the risk of inflation returning later this year, markets may decide another rate rise is still possible. That would make life less comfortable for sterling against the euro.
This is why exchange rates can move even when central banks do what everyone expected. The decision may be priced in. The wording often is not.
For buyers in France, Spain, Portugal, Italy and the wider eurozone, today’s ECB meeting is worth watching. It may not change your plans, but it could change how much sterling headroom you have in them.
EUR/USD past year
USD: The dollar regains support as risk returns
The dollar has been pulled in two directions this month.
Earlier in July, softer US inflation and weaker labour-market signals encouraged markets to question whether the Federal Reserve could stay hawkish for much longer. That helped sterling regain some ground against the dollar after a difficult June.
More recently, the dollar has found support again. Renewed escalation in the Middle East has pushed oil prices higher and encouraged investors to move back into safer assets. The US currency often benefits in that kind of market mood, even when the economic data is not entirely clean.
The Federal Reserve meets next week, and markets are watching closely for signs of whether policymakers are more worried about inflation or growth. US inflation fell in June, according to the Bureau of Labor Statistics, but it remains above target. Retail sales also rose in June, according to the US Census Bureau, suggesting American consumers have not disappeared from the tills, even if they are choosing their purchases more carefully.
For anyone buying in the US, paying dollar fees or moving money back from a US sale, July has been a useful reminder that the dollar can turn quickly. The exchange rate is being driven by interest-rate expectations, oil prices and geopolitical risk all at once. Nice and simple, then.
USD/GBP past year
Oil, gilts and politics are back in the room
The Middle East conflict has returned as a major market driver.
Oil prices have climbed again as traders worry about disruption to key shipping routes and energy supply. That matters for currencies because oil feeds into inflation expectations. If energy prices stay high, central banks may have less room to cut rates or may even need to talk tougher.
That has also fed into bond markets. Rising yields can make investors more nervous about government borrowing costs, particularly in countries where the fiscal outlook is already being questioned. The UK has not been immune to that pressure.
For sterling, this creates an uncomfortable mix. Lower UK inflation might normally support the idea of calmer markets. But higher oil prices and questions about public finances can pull the pound the other way. In currency markets, good news rarely gets the stage to itself.
What’s coming up: key events to watch
Looking ahead, several important economic events could influence exchange rates over the next couple of weeks:
- Eurozone interest rate decision – 23 July
- Global flash PMI data – 24 July
- US Federal Reserve interest rate decision – 29 July
- UK Bank of England interest rate decision – 30 July
- US GDP – 30 July
- Eurozone GDP – 30 July
- Eurozone inflation – 31 July
- UK Nationwide house price index – 1 August
- US non-farm payrolls – 7 August
- UK GDP – 13 August
- US inflation – 13 August
- US retail sales – 14 August
- UK inflation – 19 August
- UK labour-market data – 18 August
For the pound, the next Bank of England decision is the big one. Markets will want to know whether policymakers are more focused on lower inflation or still worried about energy prices and wage pressures.
For the euro, today’s ECB decision and next week’s inflation figures will help set the tone. A hawkish pause could support the euro. A softer message could leave sterling with more room against the single currency.
For the dollar, the Federal Reserve and jobs data matter most. If markets think US rates could stay higher for longer, the dollar may remain difficult to shift. If the Fed sounds more cautious, sterling and the euro could both get some relief.
How to protect your own budget
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.
