A pe­riod of re­cov­ery

Da­vide Ugolini, of Cur­ren­cies Di­rect, re­flects on what has been an event­ful time for ster­ling and ex­change rates

Living France - - Les Pratiques -

Fol­low­ing a rather dif­fi­cult few weeks, ster­ling spent much of mid- to late-June in re­cov­ery mode, climb­ing back out of the pit of po­lit­i­cal un­cer­tainty that saw it drop to its low­est ex­change rate against the dol­lar in eight weeks. In­vestors started to bet on the strength of the pound once again in the days be­fore the ref­er­en­dum on 23 June, which saw it start to ap­pre­ci­ate against the dol­lar once again, with ex­pec­ta­tions of fur­ther im­prove­ment to­wards the end of June and into the se­cond half of the year against both the dol­lar and the euro.

And while the pound’s ex­change rates were af­fected al­most ex­clu­sively by news around the EU ref­er­en­dum, it did also con­tinue the trend seen a month ago, where ster­ling seemed to be im­per­vi­ous to cer­tain poor eco­nomic in­di­ca­tors, manag­ing to with­stand the pres­sures that these put on it.

The dol­lar suf­fered some­what in June, drop­ping against other ma­jor cur­ren­cies af­ter the Fed­eral Re­serve in­di­cated that it has no real plans at present to in­crease in­ter­est rates over the sum­mer months. While it was ex­pected that the cen­tral bank would not move to make changes to in­ter­est rates in sum­mer thanks to slow and steady rises in con­sumer spend­ing and other eco­nomic in­di­ca­tors, it didn’t stop the ICE US dol­lar in­dex from fall­ing. Fol­low­ing this an­nounce­ment from the Fed­eral Re­serve, the in­dex fell by around 0.3% as con­cerns emerged and con­tin­ued to weigh heav­ily on the green­back.

Later in the month, the dol­lar also faced an un­cer­tain fu­ture as Janet Yellen, Fed­eral Re­serve chair, said there are short-term chal­lenges fac­ing the US econ­omy. Although she was con­fi­dent about the long-term growth prospects of the coun­try, she did say that is­sues such as slower in­creases in em­ploy­ment, com­pounded by the lower than ex­pected growth in May, and a stub­born in­fla­tion rate, could leave ex­change rates for the dol­lar stalling and re­main­ing low for the fore­see­able fu­ture.

Else­where, risk aver­sion was the or­der of the day, with Euro­pean and other ma­jor global mar­kets slow­ing down on the back of weak eco­nomic per­for­mance in the Far East. In mid-June, Chi­nese in­dus­trial pro­duc­tion and re­tail sales growth dropped to the low­est rate in the last decade, which neg­a­tively im­pacted con­fi­dence on a global level, with the euro­zone in par­tic­u­lar hav­ing slowed as a re­sult.

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