Friday, 17 June 2011

Poor Retail Sales hurts Sterling, but Greek debt supports GBP/EUR

17th June 2011
Good morning. Sterling fell slightly during trading yesterday, after Retail Sales figures were very disappointing indeed, and this weakened the Pound. It's very clear that the Bank of England will not be raising interest rates for some time, and this news pushes back the chances of a hike even further.

Interest Rates

Most analysts now expect the Bank of England to push up interest rates in June 2012. This is nearly a year away, and is likely to keep Sterling very weak indeed. As I've stated several times in the last few weeks, the EU are likely to raise their interest rates several times this year, and that's going to strengthen the Euro and make it more expensive to purchase.

So why hasn't the GBP/EUR rate fallen that much?

It's to do with the debt problems. On economic figures alone, it's clear that the UK economy is going to get worse before it gets better. However the debt problems with Greece have weakened the Euro slightly, so this is limiting the drop in the exchange rate. Be warned however that these debt issues won't hang around forever, and once resolved focus will revert to basic economic data, and that clearly shows that the UK is not recovering as fast as had been hoped.

The Euros problems continued yesterday when an ECB member said that the EU bailout should be doubled. This is helping to stop a significant drop in GBP/EUR rates.

Summary

With all the uncertainty surrounding the UK economy, its important to remember without the Greek debt problems, exchange rates would be significantly lower. With interest rates on the up in the EU soon with the UK unlikely to follow suit for at least a year, it's more likely that the exchange rate will resume it's downward trend before long.

Forward Contracts

If you need to buy Euros in the next 12 months, you can protect yourself against a downturn in the rate. With a Forward contract you can fix today's exchange rates for up to 2 years into the future. You only need to pay a 10% deposit now, with the remaining 90% not due until you need the currency.

In this way you can budget effectively for any purchase you need to make, safe in the knowledge of exactly what exchange rate you have regardless of which way rates move. It should be noted that once a rate is fixed, you can't then take advantage of any gains in the rate, but you will be protected against a downturn in rates.

Find out more about Forward contracts by clicking here.

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