UK inflation fell faster than expected in May. The fall was bigger than the 3.5% analysts' forecast reinforcing the belief that the Bank of England is more likely than not to keep interest rates down at 0.50% into 2011 as recovery remains bumpy and gradual with major fiscal tightening and the Eurozone debt crisis posing serious threats to growth prospects.As we outlined earlier in the week, if interest rates look like they will be hiked then it strengthens a currency. This is because higher rates mean a higher return, and spurs investment. Now that inflation is lower than expected rates are also likely to be left at 0.5%. This means that the pond has weakened and exchange rates have dropped.
SummaryWe've come quite a way down from the 19 month highs seen last week. As we predicted, the spike was short lived, and clients that took advantage of Forward contracts have been able to secure a rate for up to 2 years and protect against adverse rate movements.
Markets remain volatile - there are still problems in the Eurozone that could weaken the Euro and cause rates to rebound. At the same time, with the budget coming up in the UK, focus is shifting towards the cuts and tax rises expected. So rates could move either way depending whether investors want to invest in either the Eurozone or the UK. It's impossible to predict where rates will go. But are there ways to protect against adverse rate movements?
Do Nothing – This high risk strategy means relying solely upon a spot contract and one won’t know the rate of exchange achievable until the actual point of buying the currency. The volatility and unpredictability of the currency markets makes this strategy high risk and speculative. The markets do move both ways, so it could result in a win (or lose) situation, however it does make budgeting for the future virtually impossible.Secure a Forward Contract – This will enable you to lock into a rate of exchange the moment you know you have a currency requirement in the future. It will protect you against any market movement, both positive and negative and you will know exactly how much the transaction will cost you. Securing a forward contract with the broker, at higher level of exchange than that agreed with the supplier/purchaser will ensure a profit margin on the exchange rate alone. The benefits extend to being able to calculate budgetary forecasts for at least the term of the Forward contract.
Use Currency Options –The two key tools are a Stop Loss order, which will protect you against adverse exchange rate movements and secure your currency if it falls below a pre-agreed level. The other is a Limit order, which is placed at the top end of the market to secure currency at a specific price that may not be currently available. This type of contract is particularly useful when the markets are moving in a positive direction for you.To discuss these types of contract and ensure you achieve the best possible exchange rate, contact us today.
Todays DataNew UK finance minister George Osborne will deliver a speech today. Market players will look for clues to the new government's emergency budget to be unveiled next week which will likely include new spending cuts and tax increases to cut down the deficit - any surprise comments could affect the value of Sterling.
There are also unemployment measures today for the UK that will be closely watched and may affect the value of Sterling. In the EU, we have inflation measures that will impact on future interest rate hikes. High inflation may strengthen the currency and vice versa. In the USA we have produce prices, which again is an inflation measure. As with the EU, higher figures than expected may cause GBPUSD rates to fall, and vice versa.If you are looking for the best exchange rates, click the link below to send us an enquiry, and have a free consultation on what's happening in the currency markets.