Currency Outlook September 2018

August saw sterling hit its lowest levels against the dollar since June 2017 and the euro since October 2017 as the Bank of England hiked interest rates to the highest since 2009, ‘no-Brexit’ fears rose, and the dollar appreciated amidst heightened geopolitical tensions. Heading into September, we expect to see further sterling pressure as Brexit negotiations continue, the Fed raises rates for a third time this year, and geopolitics remains in focus.

GBP/EUR month ahead

  • The Bank of England and the ECB are both expected to keep monetary policy on hold this month. The BoE hiked interest rates last month, and the ECB has already announced it will wind down QE purchases by the end of the year and keep interest rates on hold until at least next summer.
  • As a result, FX moves will depend on updated guidance. If the BoE remains cautious on the path of future rates, the pound could head lower, particular given the broader context of ongoing Brexit pressures and no-deal fears. Key for the ECB is whether the Bank adjusts its outlook after inflation accelerated to 2.1% (note core inflation is still low at 1.1%). 
  • The rate may regain the lower end of its 1.12-1.15 band but is likely to remain subdued.

GBP/USD month ahead

  • The Fed is widely expected to hike interest rates this month, which will mark its third move this year. As the move has already been almost completely priced in, signs that the Fed is still on track for a fourth hike would be needed for additional dollar strength. If this seems less likely, a cautious hike could weaken the dollar.
  • Geopolitics and trade tensions will remain a key driver of the dollar. Continued tensions could see renewed risk aversion and the dollar gain as a safe haven.
  • On the sterling side, Brexit is set to continue posing a downside risk as the deal deadline approaches and no-deal fears remain elevated, while the BoE has had its interest rate hike for the year so the upside for the pound from monetary policy is limited.
  • As a result, the dollar seems to have the upper hand in the short-term.

 

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