Wednesday 19th June 2013
Good afternoon. Sterling exchange rates have fallen back away from recent highs, after high UK inflation numbers and a strengthening Euro. In today’s post I’ll have a look at recent market movements in more detail, and also look at how Quantitative Easing (QE) in the UK and abroad is still driving exchange rate movements. In this weeks report:
- Bank of England still split on QE
- UK Inflation higher than expected
- Euro gathers strength after Mario Draghi comments
- FED to make QE announcement this evening.
- Data for rest of the week that might affect rates
- How to get the best exchange rates
Bank of England still split on Quantitative Easing
Earlier today the Bank of England (BoE) released its latest minutes on its decision to keep the QE programme and interest rates on hold. It showed that for the fifth month in a row, the monetary policy committee (MPC) voted 6-3 in June against increasing the programme of quantitative easing (QE). Sir Mervyn, along with Paul Fisher and David Miles, voted to increase QE by £25bn, as they have done in recent months.
Sir Mervyn steps down from his role as BoE governor next month, to be replaced by the former governor of the Canadian central bank, Mark Carney, as I outlined in a recent post. While recent surveys of the economy had indicated an improvement in conditions, they said the outlook was no stronger than projections in the Bank's latest inflation report. They also said that the risks from the Eurozone remained "substantial".
As you can see from the graph of today's movements, initially Sterling fell as a result, however it recovered all of it’s losses and just after lunchtime, rates were back where they started, with the Euro at €1.1690 and the US Dollar at $1.5660.
As outlined in detail in my last post, there are concerns the new Governor will push for more aggressive QE and this is what is holding the Pound back at the moment.
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UK Inflation
Yesterday we saw some surprising inflation numbers for the UK. The rate of consumer price index (CPI) inflation increased to 2.7% in May, up from 2.4% in April, the Office for National Statistics (ONS) said. The Bank of England has said it expects inflation to exceed 3% this year. May's rise in inflation was higher than analysts predicted.
Usually high inflation would strengthen a currency, as it means that interest rates could rise to combat the rise in inflation. However with interest rates expected to remain at their record lows for some time to come, this isn’t an option. My view is it really means that investors are very nervous about the BoE's ability to keep inflation in check, and that’s why the Pound dropped immediately after the release.
Euro gains strength, pushing GBP/EUR rates lower.
Just a week or two ago GBP/EUR rates were in the €1.18’s. We have now seen rates drop by a few points, and part of this is due to a strengthening Euro. The reason it has risen in value and become more expensive to purchase was due to comments by the European Central Bank (ECB) President Mario Draghi. In a speech he said that the ECB have numerous standard interest rate policy and other non-standard measures that they can use if necessary.
What these measures are he didn’t expand on, but many think that he will do whatever it takes to protect the Euro, and this could mean negative interest rates. Markets responded positively to the news and the Euro gained strength, pushing GBP/EUR rates lower.
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US FED decision on interest rates and QE
At 7pm this evening it’s the turn of the US Federal Reserve to announce its latest decision on interest rates and Quantitative Easing. I don’t expect any movement in interest rates. There has been speculation that the FED would be reducing its QE programme, so should this be the case I would expect the USD to gather strength and pull GBP/USD rates back down.
Only a few weeks ago rates were close to $1.50, but after the biggest 1 day gain in 4 years the rate shot up, and currently sits in the mid $1.56’s. Most forecasts are still suggesting that rates will fall back below $1.50, mainly due to an improving US economy and the threat of further QE in the UK.
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So, will Pound/Euro exchange rates rise or fall?
I’m asked this question many times each day, and the truth of the matter is I don’t know, nobody knows, and it’s impossible to predict. If anyone could then they would become very rich very quickly! What I can do is explain what is driving the market to help you make an informed decision on what to do.
On the one hand, better UK data and continued problems in the Eurozone suggest Pound/Euro rates will rise. Indeed a forecast I read this morning from Barclays suggested just that, and they are predicting that rates will soar above €1.20 this year.
On the other hand, you have robust policy from the ECB that is keeping the Euro strong, and the risk of a devaluing Pound through Quantitative Easing as outlined in my last post. So rates continue to be pulled in both directions, with no indication as to which way it will go in the medium term.
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How to protect against rates moving against you
Despite the uncertain direction of rates, there are various ways you can protect against adverse rate movements and get the best possible rate.
You could place a Stop Loss order which give you a worst case scenario while still allowing you to aim for a higher rate.
A limit order is the opposite; you place an order to buy at a higher level than the market is currently at, and should rates rise even briefly, your currency is automatically bought.
You could fix today’s rates on a Forward contract for up to 2 years, and only lodge 10 % of the total, thus guaranteeing your rate, protecting against a decline and allowing you to budget.
To discuss your particular requirements, send me a free enquiry by clicking here. I can discuss your needs, run over your options and when you decide to convert your funds, the rates we can source on your behalf are exceptional – up to 5% better than the banks. You could be surprised on how much you can save.
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Economic Data
Tomorrow we have UK Retail Sales in addition to a speech by one of the Bank of England’s monetary policy committee. This could be interesting should include anything to do with Quantitative Easing and the markets will be listening closely to what he has to say.
On Friday we have some minor Public Sector Borrowing figures, but they could still affect the value of the Pound. Labels: Bank of England, Best Exchange Rates, European Central Bank, Federal Reserve, Forward Contracts, FX Stop Loss Order, Limit Order, Quantitative Easing
