Tuesday, 5 March 2013

Will the Bank of England weaken the Pound?

Tuesday 5th March 2013 
Good afternoon. After the volatility seen in exchange rates in recent weeks, this week so far has been relatively calm. The Pound/Euro rate has hovered around the 1.16 mark, with Pound/Dollar rates rising from 1.50 to 1.5120. In this afternoons post I will take a look at what data releases we have had so far this week, and also explain some key information that will come from the Bank of England that could cause exchange rate volatility to continue. 

Pound gains a little on UK Retail Sales data 

This morning figures were released that showed that UK retail sales grew at fastest rate for years in February. UK retail sales grew at their fastest rate in more than three years in February, as the drier weather coaxed shoppers back out onto the High Street. The news gave the Pound a little boost, however the gains were limited given the markets are awaiting some key releases from the Bank of England, which I will expand on a little later in today’s post. 

However the BRC figures contrasted with a recent CBI survey which reported that food stores suffered their worst performance for five years in February, which is why any gains for the Pound were fairly muted. 

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Construction falls in February 

Output in the UK construction sector fell again in February, a survey indicates, as the sector suffered its worst month since October 2009. The Markit/CIPS construction purchasing managers' index fell to 46.8, compared with 48.7 in the previous two months. 

A score under 50 indicates contraction. The last time the index was in positive territory was in October last year. CIPS chief executive David Noble said there was "barely a crumb of comfort" in the figures. The figures re-enforce the fact that the UK economy is struggling at the moment, and this is also reflected in the value of the Pound. 

Key Bank of England releases this week could affect the Pound. 

In recent months, much of Sterling’s weakness can be attributed to the Bank of England. As I’ve already covered on my blog in recent weeks, the BoE have taken every opportunity to weaken the Pound in press conference and comments to the media. They have themselves stated that they wish Sterling to depreciate further. 

Tomorrow morning (Wednesday) at 09:45am we have the BoE governor Mervyn King giving a speech. In the press conference he will give his views as to how the BoE observes the current UK economy and the value of the GBP. His comments may determine a short-term positive or negative trend. I think it’s very likely he will again use this opportunity to warn of downside risks to the UK economy, and so it would be no surprise to see Sterling weaken on his comments. 

Following his speech, at 12:00pm on Thursday the BoE’s rate setting Monetary Policy Committee (MPC) will announce its latest decision on interest rates and Quantitative Easing. While I expect rates to be left on hold, there is a real chance they could extend the QE programme. In the last meeting, 3 of the 9 members including the governor Mervyn King voted to increase the programme. So on Thursday it will only take 2 more members for a majority. 

If further QE is announced, then expect the Pound to fall further. QE effectively floods the market with Sterling effectively devaluing the currency. The last time QE was announced Sterling fell significantly within a few minutes. 


What does this mean if you need to buy or sell currency? 

The currency markets have been incredibly volatile recently, and it wouldn’t take much for the exchange rate to change dramatically and without warning. If you are buying Euros, then there is much happening that suggests the Pound could weaken further. You could consider fixing the rate now with a Forward contract to protect against this. One article in the Sunday Times recently suggested rates could fall as low as parity, where you would only receive €1.00 for £1.00. 

For those selling foreign currency back to Sterling, the current weakness in the Pound is good news. While rates may fall further, risking all the gains you have already made for slightly more could cost you dearly. There is still much happening in Europe that could weaken the Euro again, such as GDP figures released for the whole EU area tomorrow. To protect against adverse movements, you can place a Stop Loss order which means if the market moves against you, your currency is converted at a pre-agreed level. In this way you can still take advantage of any gains without risking losing all the movements in your favour over the last 8 weeks. 


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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, I provide commercial rates of exchange that are significantly better than banks or other financial institutions, sometimes by as much as 5%. 

If you have a requirement for foreign exchange, then I can discuss your 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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