Wednesday 14th December 2011
Good morning. Sterling/Euro rates rose again yesterday, gaining quite a bit during afternoon trading after reports that German Chancellor Angela Merkel rejected raising the upper limit of funding for the euro zone bailout mechanism, broadly weakened the single currency.
It was a fresh 9 month high, and in addition to the comments from Merkel, markets are disappointed by the outcome of last week's EU summit, and the threat of a credit downgrade is also looming over the EU. Sterling fell a little against the US Dollar, but remains fairly range bound at the $1.5500 to $1.5600 mark. The charts below show how exchange rates moved during trading yesterday (Tuesday) and you can see the surge in GBP/EUR in the afternoon after the comments from Merkel:
~Currency Movements Yesterday (13/12/11)~
Pound hits new 9 month high against the Euro
The fact that Angela Merkel rejected raising the upper limit of funding for the euro zone bailout fund had an immediate effect on the Euros value, weakening significantly and pushing GBP/EUR rates to fresh 9 month highs, approaching €1.19.
Also affecting rates, as mentioned in previous posts this week, the EU summit last week failed to reach any sort of agreement, or measures that would see the European Central Bank step up purchases of bonds. If they did it would relieve pressure on the struggling euro zone, and aso boost confidence in the markets. However the lack of this has meant investors selling off the Euro and it has weakened accordingly.
There is also the threat of a downgrade in the EU. Standard & Poor's warned last week that they could downgrade many Eurozone countries. Another credit agency Moody's said earlier this week it would also review the ratings of all 27 European Union states early next year. They are worried that last week's EU summit created no solution.
Weak Euro, but no fundamental strength in Sterling
The Prime Minister last week vetoed proposed treaty changes at the EU gathering. Analysts said that while this might create problems in the future, for now markets like the safety of UK assets, as they feel that at least in the UK there is a credible fiscal strategy in place to tackle debt, unlike the EU. So while we have our economic problems in the UK, the Pound remains supported against the single currency.
Yesterday we saw some inflation data which was pretty much as forecast, leading some to question whether more stimulus in the UK would be needed in the form of Quantitative Easing. The Bank of England's chief economist said yesterday that inflation would probably drop to just over 3 % early next year.
However many in the market are forecasting UK economic data like low jobs, high unemployment, slow retail sales and falling output could drive the BoE to resort to more asset purchases in coming months. As I've been saying in recent posts, more QE would flood the market with Pounds and push exchange rates lower. Last time QE was announced, GBP/EUR rates fell by 3 points in 2 days.
Will the Pound go higher against the Euro?
Impossible to say. Of course further issues in the Eurozone could weaken the Euro even more, but what other poor data could you hope for?! They have cut interest rates, many EU countries are in crisis and investors are dumping the Euro - this is what has caused it to weaken.
Some clients that need to buy Euros may want to see if it will go higher still, but in my opinion you would be holding out for an inch, and risking losing a yard. While of course it could keep rising, I believe there is much more to lose than there is to gain. Just over a month ago rates were around €1.13 - today buying €150k is £6000 cheaper due to the higher rates.
What would I do?
If I had Euros to buy, I probably wouldn't want to risk losing the gains seen in recent weeks. You could either buy your currency now, or if you are adamant you want to aim for more, then I would place a Stop Loss order - this is where you can place an order to buy should rates fall below a pre-agreed level. In this way you can still hope for the market to rise further, but have a safety net in place should rates drop. this is a good strategy to employ to make sure you don't lose out on the recent gains.
To discuss this type of order, or indeed anything to do with getting the best exchange rates, click here to send me a no obligation enquiry. I can provide a free consultation as to your options, and of course our exchange rates are significantly better than you can achieve at the bank, so the savings you make could be considerable.
When getting in touch, ask for Alastair Archbold and quote 'BLOG' to receive free transfers.