Foreign Exchange Rate Forecasts: Pound/Euro rates falling. December forecast

Good morning. In today’s post I’m going to look at the developments so far this week that have affected exchange rates, including the Bank of England minutes, UK public sector borrowing, The latest on the Greek bailout, and the downgrading of Frances Credit rating. Of course I will also take a view on how this could affect exchange rates in the coming weeks and months. Let’s start in the UK.

This morning the Bank of England released the minutes from the latest decision to hold off any more Quantitative Easing (QE) and leave interest rates on hold.

There were no real surprises; only one member voted for QE, so the vote was split 8-1.

This indicates there is less chance of further stimulus in December, however many think it’s only a matter of time before more funds are needed, so I think depending on economic figures, we could see further QE in January. If so, then expect the Pound to weaken if it starts to look more likely stimulus will be needed. The decision to leave interest rates at 0.5% was unanimous.

The Pound hasn’t fared very well this morning though, falling half a point so far from the open this morning. One reason is the news that the government borrowed much more than expected in October, reducing the chances that the UK will hit its deficit reduction target in 2012-13.

UK public sector net borrowing hit £8.6bn in October, which is a blow to the government as they were hoping that the deficit would fall by around 5%. At the moment this is moving in the wrong direction, and this is causing the Pound to lose out to other currencies, pulling exchange rates down.

Over in the Eurozone, the main concern continues to be Greece. They have failed to reach a deal to give Greece its latest bailout payment, and this threatens the whole bloc, leaders have said. Following nearly 12 hours of talks in Brussels, the Eurogroup said it needed more time for technical work. Greece needs the next tranche of its second bailout worth 130bn euros ($166bn; £104bn) to avoid insolvency.

The Eurozone "would be threatened if we did not reach" a deal, French Finance Minister Pierre Moscovici said, before adding that "we are very close to a deal." The news initially caused some weakness in the Euro, pushing exchange rates up slightly.

These gains were short lived however, and rates have already dropped below the level we have been sat at for most of the week. The reason that a weak Euro is not really pushing up GBP/EUR rates is the fact that problems in the EU have a knock on effect on the UK, so even if more problems arise, don’t expect Pound/Euro rates to shoot up.

In a further blow to the EU, Moody's downgraded France's debt from Aaa to Aa1, and kept its negative outlook, meaning it could be cut again. Moody's blamed stalled economic growth, the risk of a Greek euro exit and the risk that France has to contribute to bailing out other Eurozone countries. This leaves only Germany and the UK with AAA credit ratings from all agencies, reflecting the health of the 2 large economies.

Surprisingly it hasn’t really affected rates that much. Pound/Euro rates have been range-bound around the 1.24 to 1.2450 level for a while now, and the markets are not reacting too much to the latest news. The main driver continues to be investor confidence, and at the moment the UK is not performing too badly.

What is a concern is the Bank of England’s determination to weaken the Pound to try to help our exports. Also, problems in the EU will affect the Pound, as I’ve already talked about in detail over the last week or two.

I think it’s unlikely we will see any gains in the GBP/EUR rate any time soon, so if you need to buy Euros then consider a Forward contract. This is where you can fix today’s rates for up to 2 years, and only pay 10% of the Sterling now. The remainder would be due when you want to take delivery of your currency.

In this way you can protect against adverse exchange rate movements and budget effectively for any purchase either soon or in the future.

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