Foreign Exchange Rate Forecasts: Pound steady against Euro, but GDP estimate next week could shake things up

Firstly apologies for not posting any updates for the last week. I have been battling a particularly virulent strain of man flu and so have been out of action. The market has been fairly stable in my absence, and the Pound has had a relatively stable week against the Euro, only moving by between 1% and 2%. So after the roller coaster fluctuations we have seen in recent weeks, the last 7 days have been fairly calm.

In today’s post I will take a look at what has happened in the last week, what effect the on-going crisis in Europe will have, in addition to looking at some important releases coming next week that could move exchange rates one way or the other.

The week has been relatively stable for the Pound/Euro cross, with only movements of around 1.5% throughout the week. In comparison to recent weeks, this is quite calm indeed. One thing that could have caused Sterling to fall was the Bank of England announcement on Quantitative Easing.

The Bank of England decided on Thursday not to expand its stimulus programme of quantitative easing and has also kept interest rates unchanged at 0.5%. The decision had been widely expected, despite concerns over the strength of the UK economy.

Earlier in the year there was a much higher chance of further QE being announced, but better data of late means this has now been postponed. A closely watched survey released earlier on Thursday indicated that the key service sector grew at its fastest pace for seven months in March, raising hopes that the UK will avoid falling into recession again. This is keeping the Pound supported against other currencies, for now.

There have been signs recently that the Bank could again expand this programme, which aims to boost borrowing and investment. In the past two meetings of the nine-member Monetary Policy Committee (MPC), three of its members - including Bank governor Sir Mervyn King - have favoured an extra £25bn boost.

Although most economists had expected the Bank of England to hold back from taking any policy moves at this month's meeting, some are predicting that the Bank will take action later in the year. Mark Carney, the current governor of the Bank of Canada, is due to take over from Sir Mervyn as Bank of England governor in July, and there is speculation that this could lead to further stimulus measures. Further QE would likely weaken the Pound and push rates down again.

As regular readers will know, it has been developments in Europe that have been driving GBP/EUR exchange rate movements recently. The fiasco there has weakened the Euro, helping rates recover from their lows earlier in the year. Cyprus is only the smallest of many countries to find itself stuck between the rock of bank deleveraging and the hard place of government austerity. Spain, Italy, Ireland, Greece and, increasingly, France are all experiencing the ugly consequences for their economies. So it could be that Germany soon finds itself in a minority over its demands for more spending cuts.

Further issues in Europe could well weaken the Euro further, pushing GBP/EUR rates higher. I think most in the market however are waiting for the latest UK GDP figures to see if we are indeed in a triple dip recession. In my view that is what will drive the rate in the next week.

On Tuesday we have the first estimate of UK growth for the first 3 months of the year. If this shows a contraction, then potentially the UK is back in recession for the 3rd time since the financial crisis hit. If the figures are confirmed by an official release later this month, then expect Sterling to fall.

It’s hard to know what will happen, as forecasts are is close to zero that it’s really on a knife edge. A recession is classed as 2 consecutive quarters of negative growth. Our economy shrank in the last 3 months of 2012, and so the numbers for the first quarter of 2013 are very important, and will likely drive Sterling exchange rates in the weeks to come.

Rates are being pulled in both directions at the moment. On the one hand, negativity in the Eurozone is weakening the Euro, pushing rates up. On the other hand, continued concern over the UK economy, and the ever present threat of the UK going back in to recession is keeping the Pound from making any significant gains.

If you need to buy or sell Euros then, there are cases to be made for rates rising and also rates falling away. Of course they can’t do both, and so you could lose out unnecessarily if you simply hang on hoping that the rate will move your way. Your options are as follows.

1) Fix the rate now. In this way you remove yourself from exposure to the foreign exchange markets and protect against potential loss. Those that are risk averse should choose this option.

2) Wait and hope the rate might improve. This may pay off, it may not, and it’s nothing more than a gamble. Rates can move both ways, sometimes quickly and without warning, and so choosing this option could be risky as there is no way to forecast which way rates will go. It’s a risky option.

3) Hedge your bets. If you really think rates will move your way, then why not fix a rate on 50% of your requirement. This gives you some level of protection as if the market does not do what you want it to, then at least you secured some of your currency before it fell. Conversely if rates do indeed improve, you can take advantage with the remaining portion of your funds.

Whatever your requirement, regardless of the timescales you are working to, getting better exchange rates can make a huge difference to a large currency transfer. Even a fractional improvement in the rate can mean a very big difference to the cost of any currency.

I work as a Senior FX Trader for one of the UK’s leading foreign exchange brokers, and the exchange rates we can source are significantly better than available at the banks and other financial institutions.

Take the first step to making the most of your currency now by sending me a free enquiry. There is no cost or obligation involved, and I will simply get in touch to discuss your requirements and explain the rates we can offer you. You have nothing to lose, and potentially a significant amount to gain. Send your enquiry now by clicking here.