Foreign Exchange Rate Forecasts: Pound/Euro exchange rate forecast 2013 outlook

Good afternoon. Right then, this afternoon I’m putting up my thoughts on what has happened this week with exchange rates, what has been moving the Pound against the Euro and other currencies, in addition to what may happen in the next few days in the currency markets.

The Pound continued to fall at the start of the week, dropping to a 10 month low against the Euro. We have since seen things stabilise, and Pound/Euro is steady just above 1.19, with Pound/Dollar around 1.5850.

Now, it's quite a long post today so bear with me while we dig a little deeper and find out what has been going on. I’m going into quite a bit of detail covering:

Earlier this week figures showed that the government borrowed slightly more than expected in December, fuelling fears that the UK could lose its coveted AAA credit rating. The result was that Sterling continued its recent decline against the Euro.

All three of the major credit ratings agencies now have the UK's AAA rating on negative outlook, meaning they could downgrade its rating if performance deteriorates. The risk of this happening is really weighing on Sterling at the moment, and the Pound fell further to a 10 month low against the Euro as a result.

After a very poor start to the year in which Sterling lost 3.5% of its value compared to the Euro, some better figures this week finally halted the decline in rates. It is by no means a recovery, but rates have not fallen any further in the last 24 hours.

This morning we saw the latest UK unemployment figures, showing that the total has fallen to 2.49 million. The UK unemployment total has fallen to its lowest level for 18 months while the number of people in work has reached another record high – in fact total UK employment is now at 71%, which is the highest it’s been since records began in 1971! You can read more about the employment figures here

Despite these great numbers, the Pound hasn’t gained much ground. The number of people out of work in the UK has been falling steadily for almost a year, despite concerns over the economy's sluggish growth. This is strange however, and probably the reason Sterling hasn’t gained much strength. It seems unlikely to me that employment can continue rising while the economy is flat lining, and this can’t go on forever. There are worries that figures to be released on Friday, which I’ll go into more detail about shortly, which will show that the economy contracted during the final quarter of the year.

Also today, we heard David Cameron give his long awaited speech on the future of Britain’s position within the Eurozone, and he said the British people must "have their say" on Europe as he pledged an in/out referendum if the Conservatives win the election.

The prime minister said he wanted to renegotiate the UK's relationship with the EU and then give people the "simple choice" between staying in under those new terms, or leaving the EU.

In my opinion he has simply kicked the issue 5 years down the road. This also means that there will now be continued uncertainty over the UK’s membership of the European Union for 5 years. Markets do not like uncertainty, and so I think this could hinder investment in to the UK until our position is resolved once and for all. So all in all it’s probably bad news for Sterling, and another reason we haven’t seen rates recover significantly despite the better jobs data this morning.

Today we saw the latest Bank of England minutes, which showed that all 9 members of the Monetary Policy Committee voted to keep interest rates on hold. All but 1 of the members also voted to hold off with any further Quantitative Easing, for the moment.

So as expected really and not much movement on exchange rates. OF more importance was the governor Mervyn Kings speech yesterday evening. In it, he called for further action to boost the UK's ailing economy.

To combat the downturn, the Bank has cut interest rates to record lows and pumped £375bn into the economy to try and stimulate demand under the programme known as quantitative easing (QE). QE was "crucial in avoiding a depression," he said. So while the MPC have decided to hold off more QE for the moment, we will probably see more of it this year, particularly if Friday’s GDP numbers disappoint.

On Friday the latest UK GDP numbers will be released. At the moment most forecasts suggest that this will show the economy shrank by 0.1% in the last 3 months of 2012. You can read more about what the GDP number means here

In a nutshell, if the number is lower than this, expect Sterling to fall against other currencies. This is because it would increase the chance of the UK heading back into recession for a 3rd time, making it very likely we would lose our prized credit rating, and also mean more QE is on the cards.

Regardless whether you need to exchange Sterling for Euros, Euros for Sterling, or indeed change any other currency pair, the markets are extremely volatile at the moment.

For those exchanging Sterling, I would say the real and present risks to the UK economy mean further drops in exchange rates are very likely. Many clients are choosing to fix their exchange rate for now for any requirement in the next 6 months. You can do this by only lodging 10% of what you want to convert now, thereby protecting against rates falling further.

If you are converting another currency to Sterling, then things may get better should the GDP figures be poor, however this is not a given. You should consider placing a Stop Loss order to protect you in case the rate starts to get worse for you.

To discuss how we can help you get the best exchange rates, or to find out all the options you have open to you, contact me for a free consultation. I can discuss what you need to do, give you my opinion on the currency market movements and where analysts think rates are headed, and run over all the available options open to you. I look forward to hearing from you.