The currency markets have been full of activity this week.
I had expected the Bank of England to raise rates, and yesterday morning they hiked them by 25 bp to 4.75%!
Make no mistake, there are more rises to come in the months ahead as the UK central bank returns monetary policy to neutral (in my opinion 6% is neutral for the UK economy).
For some reason this was not expected by most economists. I don’t know what screens they’ve been watching but it was certainly no surprise to me.
The European central bank also raised rates as was widely expected to 3% from 2.75%.
American slowdown boosts the pound
As I am writing this week's Currency Watch, the US has just released its unemployment report for July which was once again a very weak number- non farm payrolls came in for the month at 113k (150k was expected) and the unemployment rate worsened from 4.6 to 4.8%.
This is real evidence of a slowdown in the US and fully justifies the FED’s decision to hold off on further rate increases.
It now looks very unlikely that the FED will now raise rates when they meet next week.
This of course is hitting the US Dollar (USD) hard (as I expected) and Sterling (GBP), as predicted, is the main beneficiary of the current dollar weakness. Now trading at 1.9070 (en route to 2.10) to the dollar.
Sterling is in fact showing good gains versus the Japanese yen (JPY) and the Canadian dollar (CAD).
Currently the Gbp/Cad is up at 2.1540 (en route to 2.20) and the Gbp/Jpy is at 218.25 (en route to 225 and ultimately 250).
I predict the US dollar will weaken further - and looks like establishing a new lower trading range versus the majors.
The Euro: destined for greatness?
The Euro should now be heading to test the year’s high at 1.2977. Once this level breaks then we will see a move on to test 1.3300 over the coming few weeks.
I see the Yen strengthening slightly versus the dollar but overall I'm pretty sure it will lag behind the Euro and the Pound, despite the Chinese revaluation story continuing to unfold.
This lag effect will allow the Euro and Pound to appreciate versus the Yen... watch this space...
That's all for today's Currency Watch. Have a great weekend and don't forget to look out for Simon Munton's very enjoyable Profit Watch Monday - with more hot trend stories.
Kind regards,
Tom Tragett
Profit Watch
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