A period of recovery
Davide Ugolini, of Currencies Direct, reflects on what has been an eventful time for sterling and exchange rates
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.
GBP to USD