Monday 22nd April 2013
Good afternoon. Since my post last week, there has continued to be volatility in the currency markets. Mid-week last week we saw poor UK Retail Sales and unemployment data weaken the Pound, causing exchange rates to fall. The GBP/EUR rate recovered towards the end of the weak due to rumours of an EU interest rate cut. On Friday, there was the news the UK’s credit rating has been downgraded by a second agency, mirroring concerns about the economy from the IMF.
So, in today’s report I’m going to have a look at what the downgrades mean for the Pound, and what this week may have in store for Sterling exchange rates.
Fitch downgrades UK credit rating to AA+
The Fitch credit ratings agency has downgraded the UK to AA+ owing to a weakened economic outlook. Fitch said its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned its outlook to "stable", removing the threat of further rate action in the near term.
It’s the second agency to downgrade the UK, after Moody's became the first major agency to downgrade the UK's sovereign debt rating earlier this year, although Standard & Poor's reaffirmed its AAA rating earlier this month.
Regarding the latest downgrade from Fitch, the Treasury said: "This is a stark reminder that the UK cannot simply run away from its problems, or refuse to deal with a legacy of debt built up over a decade. “Fitch themselves say the government's 'continued policy commitment to reducing the underlying budget deficit' is one of the main reasons UK debt now has a 'stable' outlook.
When markets opened this morning, there was an initial drop for Sterling, before recovering all its losses and the mid-market rate sits at 1.1700 at the time of writing. The reason the downgrade hasn’t had much effect on rates is because it was largely expected at some point anyway, and also the fact they still have the UK with a ‘stable’ outlook. In addition, all eyes are on this week’s GDP figures due to be released Thursday. More on that shortly.
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Christine Lagarde and New BoE Chief warn over UK growth
Compounding the poor outlook many have of the UK’s economy at the moment, the head of the International Monetary Fund (IMF), Christine Lagarde expressed renewed concern over the health of the UK economy last week. The UK's growth numbers are "not particularly good", Ms Lagarde said.
Her comments came as Mark Carney, the next governor of the Bank of England, hinted at his concerns over the UK. In an interview ahead of the meeting between the IMF and the World Bank, he said the US recovery was leaving behind "crisis economies" that included the UK, the Eurozone, and Japan.
Mr Carney has been reluctant to comment directly on the UK ahead of taking the helm of its central bank in July. But he appeared to back Chancellor George Osborne's view that austerity measures were important to promoting growth.
So what does all this mean?
In a nutshell, the IMF’s comments are more to do with politics than economics, and so exchange rates have not really been affected.
What may happen to exchange rates this week?
There are various data releases, but by far the most important is the UK’s latest GDP release at 09:30am Thursday morning. This will finally confirm whether or not the UK is in recession.
If confirmed, expect the Pound to drop. If the number shows growth, expect Sterling to make some gains. Either way I expect rates to move one way or the other on Thursday.
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So when should you buy or sell your currency?
If you are buying or selling currency, the rate could therefore move in your favour or against you, and as the GDP prediction is so finely balanced.
Therefore you have 3 options:
- Fix an exchange rate before the decision, and protect yourself against it moving the wrong way.
- Take a gamble and wait until after the decision, and hope things move in your favour.
- Hedge your bets and book half your currency before, and gamble on the rest.
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Labels: AAA Credit Rating, Best Exchange Rates, Currency Tools, GDP, George Osbourne, IMF