Thursday 19th April 2012
Good morning. Well what a day we saw in the currency markets yesterday! The Pound surged higher against all major currencies, breaking €1.22 against the Euro and $1.60 against the US Dollar. So why has the Pound gone up against the Euro? The reason was lower than expected unemployment data and general optimism surrounding the UK economy following the BoE minutes. In today's post I'll look at each event in detail and why it caused Sterling to gain.
UK unemployment much better than expected
UK unemployment has registered its first fall since last spring, according to official figures released yesterday. Unemployment fell by 35,000 to 2.65 million over the 3 months since December, and the Claimant Change was 3600 against a forecast of 7000 - so much much better than the markets had forecast.
The data was released by the Office of National Statistics and presents the number of unemployment people in the UK. There is a tendency to influence the GBP volatility. Generally speaking, a rise in this indicator has negative implications for consumer spending which discourage economic growth, so because it was much lower than had been anticipated, we saw Sterling make significant gains when the actual figures were released. It was the start of a good rally for the Pound, which was compounded when the latest BoE minutes were released...
Bank of England Minutes
Signs more stimulus from the Bank of England is now off the cards. Yesterday morning, minutes from the bank's last policy meeting showed it voted 8-1 against further Quantitative Easing, with one policymaker who had voted for QE several times seemingly changing his stance and not voting for it this time, and another now seeing the decision as "finely balanced".
The results were a big surprise to the currency markets. Most analysts, myself included, expected quite a bit of negativity surrounding the minutes. The fact that they were very positive caused Sterling to push much higher against other currencies.
Pound vs Euro
Sterling pushed through the €1.22 level against the Euro after yesterday mornings news.
When the trading floor opened rates were sat at around €1.2130, but at 09:30am when the data was released, we sat rates shoot upwards, peaking at 1.2231 before settling back at around the €1.22 level.
This is a fresh 19 month high, and if you look at weekly averages over the last few years, we're pretty much at the best exchange rates to buy Euros since the end of 2008 when the financial crisis hit.
General Outlook for Sterling/Euro
With rates so good, many clients will want to fix the exchange rate now while it is favourable. Others may want to wait hoping it will go further up. So what is my view? I think sterling could well strengthen further due to the fact further QE is no longer on the cards. However, this is not a given.
The UK's labour market is at best sluggish, domestic demand patchy and an economic recovery uneven. So while the signs of a slight recovery lessen the need for further stimulus, a rapid deterioration in the euro zone crisis could worsen the UK's outlook and drive the BOE towards easing thus pushing the Pound back down.
What you should do if you need to buy Euros
You could fix a rate now while it's so good. Even if you don't need your funds for some time, for a small deposit you can lock in the current rate for up to 2 years. If you want to gamble on rates continuing to rise, then you could place a 'Stop Loss' order. This is where you place an order to buy your currency should it fall below a pre-agreed level, for example 1.20. In this way you can still take advantage of any gains, but have a safety net and worst case scenario should we see rates start to drop.
If it were me I would want to fix the rate now while it is good, but then I am quite risk averse and not much of a gambler!
Of course each clients situation, needs and attitude to risk will be different, so to discuss the best option for you click here to send me an enquiry, and take advantage of a free consultation where I can run through all your options. Simply leaving it to chance is not a good strategy; chance is not a reliable economic tool.
Unusually for a Thursday there are no UK releases today. In the EU there are consumer confidence measures which in the absence of any other EU or UK data could have a bigger impact than normal. In the USA we have Home Sales data and the Philadelphia Manufacturing Survey.
Getting the best exchange rates
You want the best exchange rates, of course you do. That's why you're reading this blog to try and gauge your timing. Take the next step and send us a free enquiry and have a consultation on all the options available to you.
It's free, it doesn't obligate you, and you may be surprised how much you can save by using us to get exchange rates that are up to 5% better than offered by banks. Click below to send your free enquiry now, and get a response the same day.
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Labels: Best Exchange Rates, BoE Minutes, FX Stop Loss Order, Pound/Euro 19 month high, UK unemployment