Foreign Exchange Rate Forecasts: Interest Rates moving the currency markets

Good afternoon. It’s been a week since my last post which focused on the UK’s stronger than expected growth figures. Since then, the markets have been anything but quiet with an interest rate cut in the Eurozone and Australia weakening their respective currencies. In today’s report I’ll take a look at the effect of these rate cuts on exchange rates, and also what else I would be looking out for this week if I needed to convert currency. So, in Today’s report:

Last week the European Central Bank (ECB) cut its interest rate from 0.75% to 0.5%. As I pointed out in my last post, there was always the risk of a cut and my prediction of this cut weakening the Euro proved to be true. In fact, the cut itself didn’t really have an immediate impact on exchange rates; it was comments that the ECB president made afterwards that really caused some movement.

He said it was "ready to act if needed", should more be required to boost the Eurozone’s economic health. Worries about Eurozone persist, with data showing manufacturing activity across the 17-nation bloc shrank in April. The ECB also extended its cheap loans to banks until at least July 2014.

Mr Draghi said that the ECB was prepared to cut interest rates further should conditions make it necessary. He also said the central bank was "technically ready" for negative deposit rates. These comments caused the Euro to weaken and therefore cheaper to purchase. It pushed the GBP/EUR mid-market rate to 1.1900, which is the best we’ve seen it since back in January this year.

But analysts were divided over whether the cut would have much of an impact on the Eurozone economy however.

Howard Archer, analyst at IHS Global Insight, said: "Admittedly, it is unlikely that the trimming of interest rates from 0.75% to 0.5% will have a major growth impact, especially given fragmented credit markets, but any potential help to the Eurozone economy in its current state is worthwhile."

One interesting analogy I liked which I read on an article by Stephanie Flanders of the BBC, likened it to “opening the windows in a convertible when the top's already down”. You can read her views on the cut here which as usual gives a very comprehensive outline.

So what does it mean for exchange rates?

Initially it caused them to rise as I outlined above. The spike was not to last however, as this morning we had some pretty decent numbers out of the Eurozone, which has caused the Euro to regain strength, pulling the rate down from 1.19 to 1.1833 at the time of writing, as you can see from today's chart above. French Trade Balance numbers were better than expected, as were German factory orders, which combined to pull rates back down.

Australia's central bank has cut its benchmark interest rate to a record low, in an attempt to counter slowing growth. The Reserve Bank of Australia (RBA) cut its key rate to 2.75% from 3%. It wasn’t expected, as most thought that they would leave rates on hold. When markets opened this morning the GBP/AUD rate rose by a point as a result of the weaker Aussie Dollar.

Australia's economic growth in recent years has been fuelled by the growing demand for its commodities, such as iron ore. That resulted in a resources boom in Australia and helped it sustain growth through the global financial crisis. In turn, this has kept the AUD strong and exchange rates low, so this spike will be welcome for anyone who is looking to buy AUD in the coming weeks or months.

As always for the first Thursday of the first full week of the month, the Bank of England’s Monetary Policy Committee (MPC) will announce their latest decision on interest rates this Thursday at 12pm. It’s quite likely that rates will be left on hold, and I don’t expect any change to Quantitative Easing, but there is an outside chance this could be increased.

In the last few months, 3 of the 9 members have voted to increase QE, including the banks governor Mervyn King. So only 2 more would be needed for this to be pushed through. Given the latest growth figures in the UK were better than expected, I think there is now less chance of this happening, but it’s still a possibility.

If more QE was announced, expect the Pound to fall. No announcement may cause a slight gain, but don’t expect much. We’ll have to wait another 2 weeks to see how the vote went, and this again could cause the Pound to change in value.

If you need to get the best exchange rates, regardless whether you are buying or selling a foreign currency, the worst thing you can do is simply sit back and hope the rate will move in your direction. Hope is not a reliable economic tool, and often more is lost through indecision than a poor decision.

So what can you do? Your first step should be making a free enquiry with me by clicking here. I can get in touch to discuss your requirements, and run over the different options you can consider. Being fully armed with all the relevant information and knowing your options, will help you make an informed decision on what to do.

There are various options from Fixing your rate on a Forward contract, to placing lower and upper trading levels through ‘Stop Loss’ and ‘Limit’ orders.

To find out more about these and discuss your requirements, click here to send me a free no obligation enquiry today. I look forward to hearing from you.