Will the Pound/Euro rate keep dropping?

Friday 18th January 2013
Good morning. The UK is in a cold snap, and snow is falling across the country. The UK economy and Sterling has also been getting a pretty frosty reception from investors recently. This week was another torrid one for the Pound/Euro cross I'm afraid, with exchange rates continuing to fall and dropping below the €1.20 level. In today’s report we will take a look at why Sterling has fallen & what the forecast and predictions are for the coming months. We will also look at what tools we can provide to help protect you against adverse exchange rate movements to help you make the most of your currency. 

In this week’s Report: 
Sterling vs. Euro; Why have the rates fallen so much? 


The pound has now fallen 3% so far this year. Last week continued poor data pulled rates below the €1.20 level. It looks increasingly likely that 2013 could be a very disappointing year for sterling.

There are three main areas of concern for the pound: firstly, a raft of poor data shows the UK economy is struggling and that we could be headed back in to recession. Secondly we have the potential loss of the UK's AAA credit rating which is becoming increasingly likely. On Tuesday, the Fitch ratings agency warned that the UK's top-notch sovereign credit rating could be cut if the Chancellor of the Exchequer's March budget shows debt levels continuing to rise. 

Thirdly, Britain's unclear position in the EU is also weakening the Pound. We only have to look back a few months to see that currencies react badly to uncertainty. The longer this debate drags on, the harder sterling will fall. 

What could happen to rates this week?

So part of the reason for the drop is uncertainty over the UK economy. Next week will give some important clues on which way things are headed. On Wednesday we have the Bank of England (BoE) minutes, which will show how they voted on the recent decision to hold off changing interest rates or pursuing more Quantitative Easing. This may indicate further QE is on the cards and so could pull the Pound down further. 

Of even more importance will be Friday’s GDP figures. A recent estimate indicated the economy shrank by 0.3% in the last 3 months of 2012. If these figures are confirmed, it would mean the economy didn’t grow at all last year, and increases the chances of the UK heading back into recession for a 3rd time. 

The decline in the rate is not all down to the UK however, it’s also partly due to a strengthening Euro. In recent weeks we have had the ECB giving a very robust outlook for the Eurozone, and the markets now see the EU debt crisis being tackled. This has given confidence back to the single currency, and it has gained strength as a result.

So what are the forecasts for the rest of the year? 

The UK economy is still very soft and that adds up to testing times for sterling," said Daragh Maher, foreign exchange strategist at HSBC. He has forecast the Sterling/Euro rate to drop to 1.1250 by the end of the year. "There's going to be an erosion of the view that sterling was the best of a bad bunch," he said. In stark contrast, Barclays Capital still have their 12 month forecast at 1.28! This shows how uncertain things are for Sterling/Euro rates and that nobody knows which way it is going. 

In truth, nobody can accurately predict which way exchange rates will move. There are however ways you can protect yourself against adverse exchange rate movements, and make sure your currency doesn’t cost more than necessary.

How to protect against the rate getting even worse. 

Regardless whether you are buying or selling Euros, one option is fixing your rate now for up to 2 years with a Forward contract. You only have to lodge 10% of the total you want to convert, and you are then protected against the rate moving against you, and this allows you to budget effectively. 

If you think the rate will get better for you, then another option you can look at is a Stop Loss order. This allows you to set a rate below the current level, and if it drops below this your currency is automatically purchased. Using this tool allows you to take advantage of any gains in the rate, but should the market drop then you have a worst case scenario allowing you to budget. 

Make an enquiry today for free

Given there is so much uncertainty surrounding the exchange rate at the moment, with very different forecasts from major banks, now is the time to take stock of your requirements for the year. The first step should be a free consultation. In this way I can discuss your requirements and look at all the options available to you, allowing you to make an informed choice on when to fix your rate. 

Don’t simply leave things to chance and hope the rate will get better. Hope is not a reliable economy tool. Contact us today and take the first step to making the most of your currency.

Weekly Economic Data that may affect exchange rates 

Monday Fairly quiet today as it’s a market holiday for Martin Luther King day. We do have some House Price data for the UK, and some inflation numbers from Germany, the EU’s largest economy. 

Tuesday In the UK today we will see the latest Public Sector borrowing numbers, in addition to an industrial trends survey. In the Eurozone we have the EcoFin meeting and an economic sentiment survey. In the United States we will see the latest Home Sales and manufacturing numbers. 

Wednesday An important day for the Pound: First we have the Bank of England minutes, showing how the vote went for the most recent QE and interest rate decision. This is followed by a raft of unemployment numbers. The only EU data of note are Trade Balance numbers from Italy. In Canada we see the latest interest rate decision. 

Thursday UK Mortgage applications is the only data of note for Britain today. In the EU however we have Inflation data from France, Spain Germany, and the EU as a whole, which may dictate interest rate movements this year. Over in the states we have unemployment and jobless claims numbers. 

Friday We end the week with the all-important UK GDP numbers. We could see confirmation the economy is in retraction again. Elsewhere there are some business climate assessment figures from Germany, and Home Sales data from the United States.  

Getting the best exchange rates 

You want the best exchange rates, of course you do. That's why you're reading this blog to try and gauge your timing. Take the next step and send us a free enquiry and have a consultation on all the options available to you. 

It's free, it doesn't obligate you, and you may be surprised how much you can save by using us to get exchange rates that are up to 5% better than offered by banks. Click below to send your free enquiry now, and get a response the same day.  

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