Effect of Budget & Cyprus on exchange rates

Wednesday 20th March 2012 
Good afternoon everybody. Much has happened since my last post, including worrying developments in Cyprus that have weakened the Euro, and also news from the Bank of England that has strengthened the Pound, so rates are the best they have been for about a month. The Budget delivered today has also affected exchange rates. So, what have I got in store for you all in today’s post? 

  • Cyprus Bailout talks weaken Euro 
  • Pound/Euro rises as Bank of England indicate Pound is weak enough 
  • Effect of Budget on exchange rates 
  • Uncertainty over further Quantitative Easing
  • How to get the best exchange rates
So without further ado, let’s look at each of these points in turn, analyse their current and possible future effects on exchange rates, in addition to looking at ways I can help you get the best exchange rates possible. 

So what is going on in Cyprus? 

As I’m sure you have all read in the news, Cyprus is in trouble. The reason I haven’t posted on it until now is that it has been a developing story, and I wanted things to be a little clearer before discussing the effects on exchange rates. In a nutshell, in order for Cyprus to receive a bailout, they decided that up to 10% of peoples savings would be taken as a tax to prop up the banks. 

When markets opened on Monday, the effect was a weakening Euro and a rise in GBP/EUR rates. Why was this? Well it is because the latest EU bailout has dragged the debt crisis back in to the spot light, and the Euro has weakened as a result. Banks are currently closed until at least Thursday, over fears of a run on the banks. 

The ECB (European Central Bank) has made it clear however that without a reform programme for Cyprus there will be no bailout. The plans were voted down recently, but there's now a danger that they won't be able to open the banks again at all. The rescue deal for Cyprus, announced on Saturday, prompted widespread outrage on the island at the prospect of ordinary savers being forced to pay a levy of 6.75%. 

The Cypriot finance ministry announced a change in the plan on Tuesday, to exempt savers with less than 20,000 euros (£17,000), while those over 100,000 euros would still be charged at 9.9%. However, this was not enough to placate critics. The plan to tax bigger deposits at a higher rate has angered Russia, as Russian nationals hold many of those larger deposits. There are rumours that Cypriot Finance Minister Michalis Sarris is in talks with Russia for a possible bailout, in return for gas fields. 

So what does all this mean for exchange rates? The effect is will have is very hard to quantify. Should terms of a bailout be agreed, then it’s likely the Euro will regain some strength and pull exchange rates back down. While no agreement is in place, the uncertainty means the Euro is on the back foot.

Discuss your currency requirements with me today. 

Bank of England warns more QE may weaken Sterling 

This morning, the latest Bank of England minutes revealed that members of the Monetary Policy Committee remain divided over whether to inject more stimulus money into the UK economy. For the second month in a row, 3 of the 6 members voted for further QE, including Sir Mervyn King. 

One member of the MPC also raised concerns about the continuing weakness of the pound, which as we all know, has fallen significantly against the Dollar and Euro since the start of the year because of fears about the weakness of the UK economy. Ian McCafferty warned that a further fall in sterling could raise inflation, which might have "damaging" consequences. 

So what does all this mean? For exchange rates, it’s actually pretty unclear. There seems no consensus on whether more QE will come or not, so for the moment it hasn’t affected rates too much. Should further economic data support the case for more QE, then expect the Pound to fall. Should better numbers be released in the next 4 weeks, then the Pound will likely gather strength. 

Worried about which way the rate may go? Send me a free enquiry.

What effect has the Budget had on exchange rates? 

As is often the case, the budget didn’t have much of an effect on exchange rates. Initially the Pound dropped a little, before quickly recovering the losses. I won’t go in to too much detail on the budget here, other than to look at what affects exchange rate now and in the coming months. You can read a comprehensive breakdown of what was announced here on the BBC website. So what were the main points that may affect exchange rates? 

The official forecast for growth in the UK economy this year has been halved. Revised forecast is for the UK's national debt to rise to 85% of GDP Announced that the Bank of England Monetary Policy Committee had also been given an updated broader remit, but keeps its 2% inflation target. The markets have generally taken budget positively; indeed Sterling has risen against the Euro and the US Dollar. 

The main reasons for this are the fact that the deficit is being reduced, and despite the revised growth forecasts, it now looks like we may avoid a further contraction that would put us back in recession. Also of interest were changes to the Remit of the bank of England to focus on growth; however we don’t yet have the details of this. 

So in summary, not many surprises in the budget, but there is still the chance of further QE that could drag the Pound lower. While the EU debt crisis is still in the headlines however, expect Pound/Euro rates to be supported. If and when a bailout is agreed, then expect a reversal and decline in the rate. 

Contact me to discuss how exchange rates may change.

How to achieve the best exchange rates possible. 

These are very volatile times we are living in. This year alone the Pound/Euro rate has been as high as 1.2350 and as low as 1.13. With so much happening all over the world that is impossible to predict and foresee, the result is violent swings in the exchange rate that happen quickly and often without warning, as we have seen recently. 

In my last post I did highlight the risk of the EU debt crisis resurfacing, and pointed out that if it did the Euro could weaken and this is exactly what has happened. Given the economic uncertainty in the UK and Eurozone, going forwards rates could move by as much as 8% in either direction in the next few months. So what to do if you need to buy or sell currency? Do it now? Wait in the hope it might improve? 

Ultimately nobody can predict the market and advise you on when to trade. What you can do however, is use my experience and knowledge and have a full discussion with me regarding what you need to do, and the timescales within which you need to do it. I can then explain the different options you can consider, in addition to giving you an outline of what could happen with rates in the coming weeks. 

Armed with the full knowledge of options available to you, and taking advantage of discussing with me may move exchange rates in the coming weeks, you can then make an informed decision on what to do.

Don’t simply sit back and hope the rate will move in your direction. Hope is not a reliable economic tool. 

Get in touch with me today to have your free consultation, and take the first step to making the most of your currency and getting the best exchange rates. I look forward to hearing from you.