In this week’s Report:
• Pound vs. Euro; gains 3% in 3 weeks
• Interest Rate and the effect on exchange rates
• Sterling vs. US Dollar; close to the best for over a year
• Round up of the week’s data that may affect rates
(For currencies other then EUR and USD, contact us for a consultation)
Sterling vs. Euro;
Last week was quite volatile as contrasting economic figures drove Sterling up and down against the Euro. Due to high inflation and robust retail sales, Sterling ended the week not far from a 3 month high against the Euro. As the chart illustrates, rates have increased by 3% since the end of last month:
To summarise the events of the past week, initially Sterling was buoyed by figures on Tuesday showing that inflation is yet again well above the Bank of England’s (BoE) target of 2%. This caused renewed speculation interest rates may be on the rise soon, and thus strengthened the pound. The gains were short lived however, as high unemployment figures pushed Sterling back down again mid week.
The upwards trend returned however later in the week, with robust Retail Sales on Friday and a BoE member calling for interest rates to rise sooner rather than later.
Interest Rates
Interest Rates in the UK have been on the agenda for several weeks, as rising prices are causing inflation to spiral out of control. So how do interest rates affect the exchange rate? Well, as a rule of thumb low interest rates mean little return for investors and results in a weak currency.
In normal times, banks would raise interest rates to combat inflation as a result from the economy growing faster than its sustainable rate. A rate hike is thus a sign of economic strength. Usually rumour and speculation of an interest rate hike increases the value of Sterling and exchange rates rise, and indeed this is what we have seen in recent months.
The Bank of England is well aware of the economic risks that inflation poses to UK economic growth. On the one hand Mervyn King has as usual been talking down the value of Sterling, while in contrast another member of the MPC has been calling for a rate hike for some time. So, the lack of consensus at the BoE over whether they want a strong pound or weak pound is doing little to stabilise expectations of when rates will rise.
So when are rates likely to go up?
Most analysts expect the soonest rates will rise will be in the summer. When interest rates do start to go up, it’s likely this will be the catalyst for a decent recovery in the value of the Pound. In the short to medium term however, due to the fragility of the recovery meaning interest rates need to stay low, exchange rates could well get worse before they get better.
We’re close to a 3 month high for GBP/EUR, and the last 4 times this happened the rate fell back again very quickly. For this reason if you need to purchase Euros and are worried about losing out, it may be wise to consider fixing a rate sooner rather than later to take advantage of the recent 3% gain.
To put this into context €150,000.00 is over £4000 cheaper today than several weeks ago. Even if you don’t need your currency straight away, you can fix the current rate with a ‘Forward Contract’ where only a 10% deposit is payable initially, protecting you against adverse rate movements for up to 2 years.
To find our more about Forward contracts and our commercial exchange rates, click below to register an account with for free, without obligation.
Weekly Economic Data that may affect exchange rates
Below we list the main data released for the week ahead. The implication of these economic releases will differ depending on the currency you need to buy or sell. For a free consultation on how this could affect the cost of your currency requirement, open an account with us today. This is free to do, doesn’t obligate you in any way, and simply gives you access to our market knowledge and commercial exchange rates.
Monday
Its president’s day in the USA and so no economic data from across the pond. From the UK we have house price information from Rightmove. German and EU inflation figures are also released this morning. There have been recent talk of the EU putting interest rates up soon, so high inflation figures may well push GBP/EUR rates down.
Tuesday
A quiet day for the UK with only Public Sector borrowing at 09:30am. From the EU we see German consumer confidence. Canada releases retail sales figures in the afternoon followed by US consumer confidence at 15:00pm.
Wednesday
EU Industrial order figures are released this morning. This is a barometer of the manufacturing sector and can affect the value of the Euro. From the US there are home sales figures released later in the afternoon.
Thursday
Today from the EU we see economic and industrial confidence measures. These give a good idea how consumers feel about the economy and so could affect GBP/EUR rates. From the USA there are some jobless and home sales figures in the afternoon.
Friday
We end the week with service sector data from the UK, and the US in the afternoon releases GDP figures, so expect GBP/USD volatility today.
