Thursday 11th October 2012
Good morning everybody. In today’s post I’m going to have a look at how exchange rates have fared so far this week against the Euro and the US Dollar, in addition to the types of contract that are available to help you make the most of your currency if you are looking for the best exchange rates.
Sterling falls against Euro, before making modest recovery
During the first part of this week, the Pound/Euro rate steadily slipped away, at one point dropping to the low €1.23’s. The main reason for the drop was a very IMF forecast that predicted the UK economy would remain in recession for the rest of the year. This caused investors to shun the Pound and this caused it to steadily weaken, pulling exchange rates down.
The decline halted on Wednesday however, and rates started to recover and climbed back into the low €1.24’s. There was no specific data that caused the gains; it was simply the fact that after several days of losses, investors started to buy back into Sterling, causing a modest gain in the exchange rate.
So what’s the forecast, will rates recover or start to drop again?
As always this is impossible to answer, however the recent gains are not likely to last in my opinion, die to the weak UK economy and the prospect of more Quantitative Easing next month from the Bank of England. The poor numbers coming out of the UK at the moment really put pressure on the Bank of England to print more cash under its quantitative easing programme, and I expect this to happen in November. There is also talk that they may move the Interest down to new record lows, and if these things happen then it will undermine the pound in the near term and may cause a drop in rates.
Economists' forecasts for the UK have worsened steadily this year and the third quarter is expected to show only very modest growth. The weak data will increase concerns that the government will fail to deliver on its plans for cutting the deficit. This would raise the risk of the UK losing its prized AAA credit rating which could also weigh heavily on Sterling.
In a speech on Tuesday, BoE Governor Mervyn King talked about the pros and cons of inflation targeting, suggested policymakers were focusing on QE as the main policy tool for providing further easing. To me this suggests he is setting the scene for more stimulus. We will see.
So that’s that then, rates are going to fall?
They may do if we only look at UK data, however other events globally are also moving the exchange rates. Focus is back on Greece as rioters tried to disrupt Angela Merkels recent visits.
The debt crisis there is far from over, and if investors globally become uncertain over what will happen with regards to further bailouts, then the Euro could weaken and rates could start to rise again. So it’s still the case that rates are being pulled in 2 directions, and there is no way to know which way the trend will go.
If you need to buy or sell foreign currency, what should you do?
There are various options you can look at, but what you shouldn’t do is leave things to chance and just hope rates will move your way.
There are many options which you can use to protect yourself against rates moving against you, for example Forward contracts, Stop Loss and Limit orders.
A ‘Forward Contract’ allows you to eliminate the risk of fluctuating exchange rates by locking in an exchange rate today for a transaction that will take place up to 2 years in the future. Forwards are very popular when buying overseas, as it allows you to fix a rate on the balance due at the same time as securing your deposit, thus protecting you from unfavourable movements in the market. A 10% deposit is required to secure the contract.
Stop Loss and Limit Orders
For those less risk averse that are happy to gamble on the rate moving up in their given time frame, 2 other contracts are available: Stop Loss and Limit orders. A Stop Loss order will protect you against adverse exchange rate movements and secure your currency if it falls below a pre-agreed level, giving you a worst case scenario while still allowing you to take advantage of any gains in the rate should the market move in your favour.
A Limit order is the opposite; it is placed to secure currency at a specific price that may not be currently available. This type of contract is particularly useful when the markets are moving in a positive direction for you. If you have a target rate you are aiming for, you can place a Limit order to buy should it get there, while having a Stop Loss order in place to protect against adverse movements.
Get in touch today
Regardless of whether you are buying or selling currency, you should take the opportunity to have a free consultation on the options available.
Click below to send me a free enquiry now, and I can get in touch to discuss your requirements, run through your options, and explain how we can help you get the best possible exchanger rates I look forward to hearing from you.
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Labels: Bank of England, Pound Euro Forecast, Quantitative Easing, Weak UK Economy