Thursday, 7 July 2011

Interest Rates and effect on exchange rates

Thursday 7th July 2011
Good morning. Today is the busiest and probably most important day of the week. Starting in the UK, we have various measures of manufacturing and industrial production, and also a GDP estimate. We will also see the BoE interest rate decision, but we expect no change in rates. Moving to the EU, we have an interest rate decision and we expect a rise from 1.25% to 1.50%. This could well strengthen the Euro and push GBP/EUR rates lower. At 08:30am this morning rates are as follows:

• GBP/EUR 1.1169
• GBP/USD 1.5971
• GBP/AUD 1.4878
• GBP/NZD 1.9303
• GBP/CAD 1.5425
• GBP/ZAR 10.718
• GBP/JPY 129.21
• GBP/DKK 8.3274
• GBP/NOK 8.6467
• EUR/USD 1.4297

Interest Rates and effect on exchange rates

Today we have interest rate decisions in both the UK and EU. Starting in the UK, while we expect no change in rates, there has been recent speculation that the Bank of England may opt to restart its asset purchase programme (Quantitative Easing), which continued to keep the UK currency under selling pressure and weak. The decision in the UK comes at 12:00pm today.

In the EU at 12:45pm we have their interest rate decision. They are widely expected to raise interest rates today by 0.25% and signal more tightening ahead. It's hard to know how much of this is already priced into the market, but usually an interest rate hike strengthens a currency and makes it more expensive, so there is a good chance we could see GBP/EUR rates fall today.

What should you do if you need to buy or sell Euros?

You have various options:

Forward Contract; You can fix the rate now with a Forward contract, which locks in today's rates for up to 2 years, and you only have to lodge 10% of the total initially, with the remainder due when you need the currency. This option removes uncertainty and allows you to budget effectively, although if rates do go up you're stuck with the rate you've fixed.

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.

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.

Whatever you need to do, contact us today to discuss the different options so you can make an informed decision on when to buy. Don't simply leave it to chance and hope things will move your way, hope is not a reliable economic tool.

If you need to buy or sell foreign currency, click below now to send us an enquiry for free. Our exhange rates are up to 5% better than offered by banks. Take the first step to making the most of your currency now.