Friday 29th June 2012
Good morning. Sterling/Euro exchange rates have had a very strong week indeed, remaining supported around the €1.25 level. This is despite further poor data about the UK economy. The reason rates are good is because of the weakness in the Euro. Against other currencies Sterling has fallen this week. I think there is a very high chance that we will see more Quantitative Easing next week, and so I personally think these levels will not last for long. In today’s post I will look at what is weakening the Euro, and why Pound/Euro rates may fall back in July.
UK economic figures disappoint, but Sterling remains strong
We have had some further disappointing figures from the UK this week. Firstly the latest mortgage approval numbers were much worse than expected, pushing Sterling lower against currencies other than the Euro.
Yesterday the latest GDP figures were released, showing that the UK economy shrank by 0.4% in the final three months of 2011, compared with previous estimates of a fall of 0.3%. This confirms that the UK is still in recession, and a deeper one than previously thought.
The estimate for the first quarter of this year was unchanged, showing the economy shrank by 0.3% in that period. A recession is commonly defined as two consecutive quarters of economic contraction. The news pushed the Pound lower, however as stated above, it didn't affect the GBP/EUR rate as the Euro is so weak at the moment.
More Quantitative Easing possible next week
Regular readers will know all about Quantitative Easing, and to be honest are probably as bored reading about it as I am writing about it, however it's the next 'big thing' that will affect rates and so is very important.
For those that don’t know what QE is, this BBC article explains it nicely. In response to the latest figures, some economists said they expected the Bank of England to restart next week its programme of quantitative easing, designed to boost the economy by buying government debt which in turn injects money into the economy.
Quantitative easing is usually seen as negative for the currency as it increases the supply of pounds in the system. But some analysts said signs policymakers would take active steps to protect the UK economy from the euro zone crisis may be seen as sterling positive. The last time QE was announced the Pound/Euro rate dropped by 3 points. I feel we will see this announced on the 5th of July, and expect the Pound to drop as a result
Euro remains weak ahead of summit
Sterling rose again against the yesterday after a German official quashed any thoughts of rapid decisions at a European Union summit. These comments which weighed on overall risk appetite and weakened the Euro making it cheaper to buy.
European Union leaders are preparing to meet for a closely-watched Brussels summit on the fate of the euro. European authorities have unveiled proposals such as the creation of a European treasury, which would have powers over national budgets. The 10-year plan is designed to strengthen the Eurozone and prevent future crises, but critics say it will not address current debt problems.
The fear that nothing will be resolved is what has driven exchange rates this week, pushing the Pound/Euro rate close to the best in nearly 4 years.
So will rates stay at €1.25 or higher, or will they fall again?
It is these problems in the Eurozone that have kept the Euro weak and the reason why buying levels are so attractive at the moment. As discussed above the fact that more QE is on the way, coupled with the unknown factor of how the escalating debt crisis may affect the UK, then there is no reason to think levels will remain at this level. Indeed several times in the last few months we have got to €1.25 only for rates to dip back away fairly quickly.
For those that need to buy Euros, a Forward contract should be given serious consideration. This week we have conducted 3 times as many Forward Contracts than usual, as clients want to fix the rate while it’s close to the best in nearly 4 years.
Even if you don’t need your Euros for some time, we can lock in the current rate for you, and you only have to lodge 10% of the total you want to convert. In this way you can protect yourself against adverse exchange rate movements, while retaining the majority of your capital, safe in the knowledge you have fixed close to the best rates in many years. Please note Forward contracts are only available for conversions of £10k+. Click here to find out more about them.
Sterling has not actually fared very well against other currencies. Against the US Dollar for example, the Pound has dropped down to the $1.55’s. This is partly due to the poor economic data pulling the Pound down, and partly due to the US Safe haven status. When there is economic uncertainty, the USD generally strengthens and becomes more expensive to buy. This is what we have seen this week.
The blog will be a little quiet for the next week, while I take a short holiday. Blog posts will resume on Monday the 9th of July. My twitter feed will continue to run, posting several updates throughout the day of where GBP exchange rates are, and any interesting stories that affect the exchange rates.
You can still make a free enquiry about our services, and one of my colleagues will respond to you in my absence to explain how we work and how we can help you. when you speak to one of the traders, make sure you quote 'AJABLOG'
I look forward to continue to keep everybody updated with the markets, and continue helping clients achieve the best possible rates of exchange when I return!
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Labels: Best Exchange Rates, EU Summit, outlook/forecast, Pound/Euro Forecast 2012, Quantitative Easing