With UK political risk out the way, investors and speculators have been shifting their focus to the Eurozone.
The sovereign debt worries were compounded yesterday with expected austerity measures coming in Spain, and also poor take up of a German debt auction. As you can see from the illustration, most of the EU has severe debt problems, and this is what's causing Euro weakness.
Coupled with these problems is the fact the policy makers response in the EU seems to be very uncoordinated.
This has meant more and more investors have become worried and there has been a big selling of Euros in the market. It's simple supply and demand; if you flood the markets with anything be it currency or even bread or eggs, then the value drops and it becomes cheaper to purchase.
This is what's been happening with the Euro as investors flock back to the safe haven dollar. The net result is a very weak Euro and a very strong dollar.
Sterling in between is largely unchanged, but the EUR and USD effect means exchange rates to buy Euros has climbed and is now only half a point or so below the highest rates for nearly a year. However, despite the fact that things are better in the UK than the EU, the fact remains that debt levels in the UK are still very high, and the struggling UK economy was highlighted yesterday when figures showed mortgage lending was it's lowest since 2001.
So what will happen over the next few months?
Well, focus for the moment will remain on the Eurozone. At some point this crisis is going to pass, and agreement reached on the EU banks and debt. When this happens, investors will become more confident in investing back in the Eurozone, and the Euro will likely regain strength and become more expensive to purchase again.
The UK meanwhile still has some way to go before the recovery is cemented. So, we expect the recent high GBP/EUR rates to be fairly short lived, and rates to drop back away. at some point through the year, the pound will recover back as all the spending cuts are announced and dealt with. Toward the end of the year, we expect the pound to bounce back.
I need to buy currency, what should I do?
Unfortunately no-one has a crystal ball to see exactly what will happen with rates and when. Looking at the facts we do know, and it's likely the pound will remain weak for some time, and it's only the Euro weakness that's keeping rates high.
If you need to buy currency within the next 3 months, then rates will certainly remain volatile. There are various options and ways to reduce the risk when you need to buy currency. Click here to look at the different options when managing FX risk.
What you don't want to do is simple leave it to chance and hope rates move in your favour. Hope I'm afraid, is not a reliable economic tool.
Our exchange rates are up to 5% better than you can achieve at the bank, so get in touch to see how we can help smooth the process of your currency exchange.
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