Foreign Exchange Rate Forecasts: Sterling gains after strong GDP. What's the currency forecast going forwards?

Good afternoon. As I’m sure you have all seen in the news already, the UK has avoided recession and the GDP numbers were a little higher than forecast. This has pushed the Pound higher against other currencies, which will be welcome for those looking to buy currency with Sterling.

In today’s post I will take a look at the numbers and their effect on exchange rates. I will also look at what may cause rates to fall back away in the coming weeks, and also make the case for further gains.

The UK economy has avoided falling back into a recession after figures released yesterday surpassed expectations, showing growth in the first three months of the year. The Office for National Statistics said its first estimate for gross domestic product (GDP) showed the economy grew 0.3% during the first quarter of 2013, which Chancellor George Osborne said it was an "encouraging sign".

Economists say the news should give a small psychological boost to consumers and businesses, but the broader picture of the economy remains the same. Poor growth has already led to two international credit rating agencies stripping the UK of its top-notch triple-A rating.

As a result, Sterling has strengthened nicely against the Euro, US Dollar and other currencies, and exchange rates are now the best they’ve been since January.

There is increasing pressure for the European Central Bank to cut interest rates, possibly as soon as next week. German confidence is down, banks are reducing lending, and after the council discussed the possibility of a rate cut last month, data next week will be watched very closely, and the chances of them reducing the rate from 0.75% to 0.5% is now quite high.

If they do go ahead and cut rates, then I would expect the Euro to weaken, causing it to become cheaper to purchase so we may see an increase in rates should this happen.

In contrast to the UK’s better than expected GDP, the US economy grew at a slower rate than expected, figures showed today. The US economy grew 2.5% in the first three months of the year, helped by the strongest consumer spending figures in two years. While the growth figure was lower than analysts' expectations, it was better than the 0.4% rate recorded in the final quarter of last year.

What effect did this have on exchange rates? It weakened the US Dollar, making it cheaper to buy, and the rate rose as a result as you can see from the daily chart.

So the question on everyone’s lips now is will rates continue to rise towards and above €1.20? There is no way to predict exchange rates, and of course should UK data continue to be positive, rates may climb further. One risk however is the Bank of England purposefully talking the Pound down.

In recent months they have taken opportunities to be negative about the UK economy, in order to weaken Sterling. They do not want the exchange rate to be as high as it currently is, as it makes our exports more expensive. Therefore don’t be surprised if the governor Mervyn King talks the Pound down to try to bring exchange rates back towards 1.15.

As I often say here on my blog, there is no way of second guessing and predicting which direction the market will take. If I knew what the market was going to do, I would be a millionaire! What I can do is explain the case for rates moving each direction, and in doing so help you make an informed decision on when to fix a rate....

The UK is growing at a faster pace than predicted and economic numbers have impressed in recent weeks. Should this continue then we may see the Pound get even stronger. We also have a possible interest rate cut in Europe, which would further weaken the single currency and push rates higher.

Finally, if the debt crisis over in Europe spreads to other countries, the Euro may weaken even more. One or more of the above would likely lead to an increase in exchange rates.

The GDP numbers released recently will be subject to two revisions in the coming months, and so it may transpire that the economy didn’t grow quite as much as 0.3%. We also have the Bank of England who openly want a lower exchange rate, as I outlined above.

Also, should the markets become more confident of progress in Cyprus and elsewhere, we may see the Euro become stronger again, and therefore more expensive to buy. Once again, one or all of the above would likely cause exchange rates to plummet.

The first step is to take advantage of a free consultation. You can make a free enquiry by clicking here, and I can then get in touch to discuss your particular requirements, and explain the different options you can consider to protect yourself against adverse rate movements.

In this way you can make an informed decision on when to fix your rate, and when you want to do this, I can source commercial rates of exchange that are up to 5% better than the banks, so you can save a considerable sum of money in using my services to get a better rate.