Wednesday, 22 August 2012

Why have Pound/Euro rates fallen?

Wednesday 22nd August 2012
Good morning. Today I’ll give a brief mid-week update on what is happening with exchange rates. We had seen the GBP/EUR rate recover back close to 4 year highs; however rates have been in decline this week. Today I’ll look at what has caused this, and which way rates may move in the coming weeks.

Why have Pound/Euro rates fallen?















Yesterday we saw GBP/EUR rates fall back into the mid €1.26’s. There were 2 reasons for this; firstly the UK deficit grew more than expected, which I’ll examine separately in a moment. The main reason for the fall was a strengthening of the Euro, caused by growing expectations the European Central Bank will take action to ease Spanish and Italian borrowing costs.

The anticipation of measures being taken in the coming weeks, to try and resolve the on-going debt crisis has been welcomed by investors. As a result, it’s spurred investment into the single currency, and this demand has caused strength, making it more expensive to purchase.

Talk of ECB intervention in debt markets resurfaced after a weekend report in Germany's Spiegel magazine that the central bank would target specific yield levels as part of any bond-buying programme. Reports At the beginning of the week said that the ECB played down that speculation; however there were reports that confirmed ECB experts were examining plans to cap Spanish and Italian yields.

"The focus is very much on the ECB's pledge of intervention, in combination with the EFSF," said Deutsche Bank economist Mark Wall, referring to the Eurozone rescue fund. The ECB is expected to detail its plans for addressing the Eurozone’s debt crisis in September.

If they do go ahead and we hear more concrete talk of this becoming a reality, expect the Euro to remain relatively strong. Don’t’ underestimate the Eurozone’s willingness to resolve the crisis. See below for my thoughts on what to do if you need to buy Euros.

UK Deficit Increases


As mentioned above, the Pound also weakened slightly when data showing Britain's public finances unexpectedly veered further off-track in July and a survey revealing a slump in factory orders this month as demand for consumer goods dropped.

Four months into the financial year the government has borrowed £44.9bn, £9.3bn higher than the same period in 2011. The OBR had predicted that borrowing on the same measure would be £120bn for the whole of the financial year, down from the £125bn borrowed last year.

This has reinforced the fact that the Pound is very weak – we’re in recession (still!), there is no growth, and unemployment while better than it has been, is still high. This is keeping Sterling weak relative to other currencies.

Pound/Dollar at 3 month high















Despite the Pound weakening and falling against the Euro, Sterling rose to a 3 month high against the US Dollar. Really this is again due to the news from the EU – as the Euro gained strength, the Dollar weakened as investors that had been holding them due to their safe haven status, moved back to riskier currencies.

This weakened off the Dollar, pushing rates up despite the Pound getting weaker.

So what is the forecast for GBP/EUR rates for the rest of the year?

Many people still seem to think that rates will get to €1.30, but when questioned they can give no logical reason why. They have just seen it get close, and think that therefore it must get there. The highest the rate has been in the last 4 years was 1.2860 over a month ago, and since then we have seen rates in decline.

The Pound is at record lows against most currencies. The only reason rates are still quite good against the Euro is due to the debt crisis. Now that investors are more confident of a solution, the Euro has been slowly regaining some of its value, and that’s why rates have been falling.

If you need to buy Euros, then consider the fact the rate is still within a few points of a 4 year high, which is not too bad at all considering rates were 10% lower at the end of last year. Don’t end up holding out for an inch only to lose a yard.

If you need to buy or sell Euros, then contact me now to discuss the options you have available to get the best possible rates and make the most of your currency.

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