Wednesday, 27 February 2013

Will Pound/Euro drop or go up?

Wednesday 27th February 2013 
Good afternoon. The Pounds rollercoaster ride has continued, with GBP/EUR rates moving between 1.1350 and 1.1650 in the last few days alone. In this afternoon’s post, first I will take stock of what has caused all the volatility. I will then look at what may happen in the coming days and weeks that might affect the exchange rate.

Finally, for those that are trying to time their purchase and who want to know whether to buy currency now or wait in order to get the best rate, I will go over the case for rates falling further, and also what might cause rates to recover. So in today's post you will find out all about....

  • Overview of why the Pound has fallen
  • Euro weakness could push rates back
  • Why rates may continue to fall
  • What needs to happen for rates to recover
  • How to get the best exchange rates
I’ve gone in to quite a bit of detail today, but there’s lots to talk about so I make no apologies for this! So, read on below to get a full understanding of what is happening in the currency markets, and armed with this knowledge you can make an informed decision on when to fix a rate. 

When the time comes to do this, the rates I can source are up to 5% better than banks or other financial institutions. If you want the best exchange rates send me a free enquiry now. 

Pound falls to new lows after credit rating downgrade 

On Monday, the Pound fell to its weakest in nearly 2 years against other major currencies after Moody's stripped the UK of its triple-A credit rating. Although the news wasn’t a massive surprise, most didn’t expect this to happen until later in the year. 

Further falls in the pound are expected in the coming weeks given the grim outlook for the British economy, the prospect of more Quantitative Easing from the Bank of England (BoE), and growing evidence that the BoE is comfortable with a falling currency as it seeks to re-balance the economy and encourage exports. Rates did recover though after political uncertainty in Italy… 

Italy’s Election weakens Euro 

The single currency has rallied strongly in recent weeks as fears of an imminent break-up of the Eurozone eased, pushing Pound/Euro rates lower, but all this changed this week. Panic spread through the currency markets as political paralysis in Italy sent the Euro tumbling. The result in Italy is expected to slow the country's recent economic gains, and threatens to tip the entire Eurozone back into full-blown crisis mode. 

Markets hate uncertainty, especially political uncertainty, and so if investors begin to doubt that Italy will enact reforms to keep its economy on track, the damage will quickly spread to other European countries, amidst fears that Italy is too large for an EU bailout. This is why rates bounced back from the lows we saw on Monday.

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Some rare good news for the UK as GDP figures revised upwards 

Earlier today, the Office for National Statistics confirmed the economy had contracted by 0.3pc in the final quarter of last year. However, it revised up its estimates of previous quarters, and said there was 0.2pc growth in 2012, up from the zero growth it had estimated previously. There wasn’t much reaction in the markets, the Pound gained a little but these gains were short lived, as focus is still on the Bank of England and possible Quantitative Easing on the horizon. 

So, now that we have taken a look at what has been causing all the recent volatility, inevitably what my readers will want to know is will rates fall or will they rise. I don’t have the answer to this. Nobody does as the markets are impossible to predict. What I can do is explain the case for each scenario, and what may cause movements in either direction. Hopefully this will help you make a decision on what to do. 

So let’s have a look at each scenario now… 

Case for the rate continuing to call. 

The BoE have themselves stated they want rates to fall further. A senior Bank of England policymaker indicated that the pound may need to weaken further to help make exports cheaper and spur growth. Martin Weale said in a speech earlier this month: “Provided the calmer atmosphere we have seen since the summer is sustained, we may see further benefits of the depreciation.” 

Other credit rating agencies may downgrade the UK, and more QE may be on the cards. The recent downgrade compounds pressure on the pound that emerged last week after minutes of a BoE policy meeting showed officials, including Governor Mervyn King, edged closer to another round of the bond-buying programme that pumps more money into the economy -- a policy known as quantitative easing (QE). 

We also have the threat of a contracting economy and of course uncertainty over our future in the Eurozone. All these reasons combined do suggest that Sterling could weaken further and rates may fall. 

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Case for rates climbing back 

Although the pound has been weakening, Capital Economics believes the "biggest falls in the pound may now be behind us". They said that since Tuesday, Sterling had been fairly stable and that the pound could benefit soon from a shift in perceptions of sovereign credit risk in the UK compared to elsewhere. "The threat from a potential divergence in the unconventional monetary policies of the Bank of England and its peers abroad is probably also overstated," said Capital Economics. 

We may not see the UK economy shrink, and any good news may boost Sterling slightly. There is also the issues resurfacing in Italy, and if the debt crisis becomes centre focus again, the Euro could weaken pushing GBP/EUR rates back up. 

If you need to buy Euros 

I think that chance of further drops far outweigh the likelihood of recovery. There really are dark skies on the horizon for the UK economy and for this reason if I needed Euros I would do one of 2 things. Either fix the rate now to protect against potential falls, thereby removing your exposure to the volatile market and budget effectively. Alternatively, if I really thought rates might recover, I would fix a rate on at least half my requirement, thereby hedging my bets and giving some level of protection regardless what the market does. 

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If you need to sell Euros 

Rates rate are their best in quite some time. Moving €250,000 back to Pounds would get you £12,000 more than back in January. Rates may drop further, but you don’t want to hold out for a little more and risk losing the gains. I would place a ‘Stop Loss’ order to fix a rate if it starts moving back up. In this way you can continue to take advantage of any gains, but should the EU debt crisis start to move the market the wrong way, you know your worst case scenario and can have a specific rate should the market move against you.

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Get the best exchange rates now

Hopefully my post today will have been helpful to anybody needing to buy or sell currency that are worried about the current volatility of Sterling. I am a senior FX Trader for one of the UK’s leading foreign exchange brokerages, and in addition to the insight I provide on exchange rates, we provide commercial rates of exchange that are significantly better than banks or other financial institutions. 

 I am happy to speak to anyone that needs the best rates, and discuss requirements in detail. I knowing what you need to do, I can then suggest options you can consider. When you decide to fix a rate, the levels I can source often save my clients thousands of pounds. 

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