Thursday, 26 July 2012

Pound falls from highs after GDP figures

Thursday 25th July 2012
Good morning everybody. The Pound has dipped against the Euro. At the beginning of the week Sterling was riding high, and at the time I warned that it may not be the case rates will remain at those levels and we could be in for a drop. Indeed the pound fell quite sharply against the Euro and other currencies, after data showed the British economy contracted by more than three times the rate it was expected to in the second quarter, increasing the prospect of more monetary easing by the Bank of England.

UK recession worsens after 0.7% GDP fall

After the figures were released, most news websites and organisations took a very political slant to the news, either hailing the figures as ‘Conservatives Ruin Economy’ or ‘Labour ruined the economy and Conservatives try to fix it' depending on which newspaper you read and their political affiliation. I’m not going to bother with any of that here; all I aim to do is analyse what it means for exchange rates, and what direction they may take in the future. In this way you can hopefully make an informed decision on when to exchange your currency, and of course use us to get the very best exchange rates.

So why did GDP make the Pound drop?

The GDP figures yesterday were much worse than expected, and the Pound took a bit of a hammering as a result, as the graph shows. The reason it fell is that the poor growth figures show that we’re still mired in the worst double dip recession in 50 years, and so we now expect more action to try and combat this.

What shape will this action take? It’s probably going to either be Quantitative Easing shaped, or take the form of an Interest Rate cut in the UK. Both of these would weaken the Pound further due to the lower return Sterling will give investors.

Analysts confirmed these fears yesterday when they said that sterling could be vulnerable to more falls as the market starts to price in the prospect of further quantitative easing or even a cut in interest rates by the BoE.

Paul Robson, currency strategist at RBS, said the GBP/EUR rate could drop even lower if the market starts to price in an increasing probability of a cut in interest rates from their current record low 0.5% in the coming months.

So that’s it then, rates are going to keep falling?

Probably not by too much. Despite all the doom and gloom, I do not expect sterling to stray too far from its recent high against the euro. As fears grow about whether Spain will need a full bailout and whether Greece will leave the euro, I expect that Sterling will still be a very attractive option for investors seeking alternatives to euro zone assets.

Having said that, things are so uncertain we may not test the highs again.

How to avoid getting caught out by market movements.

Clients that read my reports knew that continued gains were not a given. In a recent post I suggested 2 options – a Forward contract to fix rates while they were high, or a ‘Stop Loss’ order where your currency is bought if it drops below a pre-agreed level.

Those that pursued either of these options will have saved a significant sum given the recent market movement. If you had fixed forward, the drop would have had no impact on you as your rate is already fixed. If you had a Stop Loss in place, then you had a worst case scenario and your currency will not have cost you any more than you had budgeted for.

Both of these options still hold true as a sensible strategy to ensure you have some control over the market. Those selling Euros should consider taking advantage of the spike to the downside. Those buying really should have some protection in place as outlined above.

Don’t just sit there and hope rates will go back up. Of course they might well do, but a Stop Loss means that if they do keep dropping you won’t be kicking yourself of what 'could have been'.

Sounds great. How do I get involved?

Make a free enquiry with me now. It doesn't cost or obligate you, and it give you access to excellent market knowledge, great rates of exchange, various market contracts and a direct line to me on the trading floor. I trade millions of Pounds in the FX markets on behalf of my clients every week, and it is this volume that allows me to source commercial rates that are significantly better than you can get elsewhere. Find out how good my rates and service is by contacting me now.