Friday 10th February 2012
Good morning. As I predicted in yesterdays post, the Bank of England announced a further £50 billion in Quantitative Easing, and left interest rates on hold, as did the European Central Bank. Despite a temporary gain for the Pound in the immediate aftermath of the announcement, rates fell back away and ended the day largely unchanged, as yesterdays graphs demonstrate:
~Currency Movements on Thursday 9th February 2012~
Central Bank announcements as expected
Yesterday as expected the BoE announced a further £50 billion of Quantitative Easing. The Bank justified its decision against a backdrop of a weak economy, uncertain outlook, and falling inflation.
In a statement they said "In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries."
As the charts above show, in the immediate aftermath of the announcement to pump an additional £50 billion into the economy, the Pound made gains against the Euro and US Dollar. This was due to the chance of up to £75 bn being announced, so when the lower figure was released the pound made some temporary gains. These were quite short lived however, and we ended the day where we started, with exchange rates largely unchanged.
European Central bank also leave rates on hold, but for how long?
The European Central Bank also kept base rates unchanged at 1%, but there are chances it could flag more cuts in the near term. Investors are also hoping that Greece will strike a deal to avert a default soon.
What next for Sterling/Euro exchange rates?
The key driver for this currency pair will now be what happens in the EU, with focus now returning to the debt crisis, and Greece in particular. There are some that say Greece will soon agree a deal to avoid a default, and this would calm the markets strengthening the Euro, and could push GBP/EUR rates lower.
However, if there is no deal agreed and the ECB do cut interest rates in the coming months, the Euro could continue to weaken pushing GBP/EUR rates back up again.
So despite the QE uncertainty now being settled, rates could go either way depending on developments in the Eurozone.
Strategies to employ if you are buying or selling EurosIn the current climate with no particular consensus on whether rates will rise or fall, Stop and Limit orders come into their own. For example, lets say you need to buy €150,000 in the next 6 months. You don't want to hold out for higher rates only for the market to drop away, increasing the cost of your currency. Likewise, you don't want to fix your rate now only to see it go higher in the coming weeks and months.
Let's say you're currently able to trade at a level of €1.19. What you can do in this example is place a 'Stop Loss' order at €1.16 - if rates drop away below this level, your currency is secured giving you a worst case scenario; a safety net should rates drop.
At the same time, you can place a 'Limit Order' at a level of €1.21 - if rates hit this level, 24 hours a day 7 days a week, your currency is automatically purchased. Even if you're not following the market, your order is placed allowing you to take advantage of any short term spikes.
Taking control of the market in this way allows you to take advantage of any gains without leaving yourself open to significant drop in rates. You can place these type of orders regardless of which currency you need to buy or sell.
The alternative is simply hoping the market will move in your direction within your time frame. Hope is not a reliable economic tool, and leaving things to chance mean you're letting the market control you. Don't!
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