The Pound became a lot stronger in July, holding its ground against the Euro and positively rocketing against the US Dollar, posting a gain of almost 5 percent. The reasons for this surge in strength are multifarious, but for the most part it boils down to the US Dollar weakening due to the turbulent global situation.
Sterling’s better-than-expected performance could seem strange at first glance as the economic figures have been generally underwhelming and the news headlines have been filled with talk about further lockdowns and a potential second wave of Covid-19 hitting. Nevertheless, investors came around to the notion that the Pound was undervalued compared to its rivals, and with the US Dollar weakening so much (see below) the Pound has naturally benefitted.
While focus on the coronavirus outbreak has been on and off over July, markets began to take notice of economic figures once more. Sterling investors were pleased to see a huge 13.9 percent rise in retail sales in July – which comes on the back of a similar rise in June – pointing to some form of restoration of the economy. On the downside, deadlocked UK-EU trade talks over Brexit put a dampener on any further rise in the Pound.
During the course of July we have seen the Pound strengthen markedly against the Greenback, rising continuously from $1.25 to $1.31. The mighty US Dollar is sinking under the weight of a triple whammy in the form of dire economic data, a surge in Covid-19 infections across several states, and domestic political turmoil. Donald Trump’s suggestion that the November presidential election could be delayed if there was any sign of voter fraud further put the frighteners on already nervous Dollar investors.
It is perhaps no surprise that the economic news pushed the Dollar lower as it was revealed the US economy shrank at a rate of 32.9 percent in the second quarter. While this was more-or-less expected, confirmation of the numbers caused market jitters.
But the real worry for USD investors is that the Greenback might actually be losing its reserve currency status. Normally, in times of global economic and geopolitical volatility the Dollar is a safe haven in which to park investment funds. The idea that this status could be coming to an end is seeing USD holders heading for the exits. The Pound has been quick to take advantage of this weakness, causing GBP/USD to rise some 4.8 percent over the month.
It is to the Pound’s credit that it managed to hold its own against the Euro during July, with the single currency continuing its bull run and going even higher on Forex markets. In fact, having started off the month at €1.11 the GBP/EUR exchange rate ended up at exactly the same rate, despite some fluctuation in the intervening weeks.
What is keeping the Euro so strong? In part it’s to do with the huge €750 billion stimulus package put forward by the European Central Bank and agreed by individual member states in an unexpected show of unity. It’s also to do with the US Dollar coming under so much pressure – traders are swapping their USD for EUR and it shows.
At the same time, the Eurozone has shown promising signs of a ‘V-shaped’ recovery, with manufacturing, services and construction PMIs moving back into growth for the first time since February and confidence returning. Of course, this could all be derailed in there is a resurgence in Covid-19 cases over the coming month(s) but for now the Euro continues its exuberance.
The Canadian Dollar did well during July due to a range of better-than-expected economic figures and a firming up of the WTI oil price. Still, the Pound did better, with GBP/CAD posting gains and ending the month substantially higher at CA$1.75. However, with Canada’s economy so closely tied to the US, any further destabilisation and weakness in the latter could impact the Loonie over the coming month.
The Aussie continued to appreciate in strength against most currencies during July, although not against the Pound. GBP/AUD began the month at AU$1.80 but by the end it had risen to $1.83.
From the point of view of the Pound this performance is impressive given that global risk appetite is continuing to hold up (despite jitters about more Covid-19 cases and the US and China issuing threats to one another), and Australian data has impressed markets in recent weeks – factors that have led to the Australian Dollar hitting the highest level against the US Dollar since last year.
AUD also benefitted from a surge in the price of precious metals – gold and silver – which are an important export for the country.
August promises to be a bit volatile, with numerous factors all beginning to converge simultaneously. On the one hand we have the unprecedented weakening of the US Dollar seemingly picking up pace – despite an upsurge in global risk factors – and on the other we have the wild card of surging Covid-19 cases which has the potential to upset a number of national economies before they can get back on track.
With central banks still flooding markets with stimulus (sometimes uncharitably called “printing money”) and interest rates remaining at record lows, it doesn’t seem likely that there will be any changes to these policies in the month ahead. Then again, with the Euro’s continued strength it could only be a matter of time before the ECB steps in and talks the currency down so as to avoid damaging EU exports and competitiveness. This would likely see GBP/EUR receive a boost.
We will probably see some further direction for the Pound mid-month when the UK Q2 GDP figures are released. Any big shocks here could undermine the Pound’s recent strength – as could any negative news on the UK-EU Brexit negotiations front. Meanwhile, from a global risk point of view, analysts are hoping that China and the US will wind down their war of words or risk an upsurge in instability on the FX markets.
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