U.S hints rate hikes, UK Elections & Greek political uncertainty likely to persist

We have had another volatile week on the markets with the FOMC minutes from the U.S leaning towards a rate hike again, this strengthened the Dollar immediately against Sterling and the Euro and also put weakness back into the Euro which pushed the GBPEUR exchange rate back around the 1.38 area.

USA

News leading up to interest rate decisions are always roller coaster rides as far as exchange rates are concerned; Just last month we saw the Fed lean against an interest rate hike which momentarily weakened the Dollar and now this month we have seen the exact opposite; why is this?

The simplest way to understand currency is to view each country as if they were a corporate entity- If a company imports goods from overseas, then they will require a strong base currency; If they are a more export orientated company, then they will require a weak base currency to attract importers to buy their goods.

So with this in mind, the USA both imports and exports goods, so their currency is usually a good median, recently when EURUSD exchange rates were at 1.05 this was not beneficial for any exports from America, which reflected in it's trade balance figures last month. This is why it made sense for the Fed to make an announcement to weaken the Dollar again to stimulate the economy and help exporters. The long term view is that the Fed will do an interest rate hike this year between June and September, so my guidance to Dollar buyers is to hedge yourself now as we will see GBPUSD exchange rates at the low 1.40's when this does happen and EURUSD exchange rates possibly at parity.

Europe

Greek political uncertainty is expected to persist and act as an additional risk factor for the Euro. The cash troubles for Greece are likely to remain in the coming weeks despite last week's IMF payment and issuance of 1.14bn Euros.

Greece is expected to be hard pressed to meet all end of the month public sector payments. Similarly, banking sector liquidity conditions have worsened, as the increased ELA usage demonstrates, and it is unlikely that bank deposit outflows will abate as long as the outcome of the negotiations with the creditor "institutions" are uncertain.

UK

The main factor affecting the Pound right now is the UK elections; Recent opinion polls have shown that right now there is no clear majority between Tories or Labour. The likelihood of a coalition government is almost certain which in turn will most probably weaken the Pound.

The coalition will most likely be either Labour or Conservative with the SNP. This will most probably avoid the EU referendum but will probably mean another Scottish referendum.

The problem with politics is that it is very unpredictable as far as speeches and polls are concerned, my guidance to anybody selling the Pound and would like to know how to minimise their risk then please contact us and we will be more than happy to assist you.