Friday 28th June 2012
Good afternoon. The last week has seen the Pound/Euro exchange rate fall away as I have been predicting could happen for a few weeks. Sterling also fell against other currencies, due to data showing the UK economy is not quite as healthy as thought.
In today’s post I will look over what has caused rates to move recently, what data is coming this week that might affect rates, and look at ways you can protect against the exchange rate moving against you.
- Pound weakens following revised growth forecasts
- New Bank of England governor takes over this week
- Announcement due Thursday on QE and interest rates
- Where GBP/EUR and GBP/USD could go in coming months
- Getting the best exchange rates
Pound weakens following revised growth forecasts
There was a revision to UK GDP this week, which is an overall measure of growth in the economy. The numbers were both good and bad news. Let me explain. The ONS periodically updates its previous measures of growth, and they have said that growth was flat in the first quarter of 2012, revised from an earlier estimate of a 0.1% contraction. This means that the UK economy did not experience a double-dip recession at the beginning of 2012. That was the good news.
However the revised figures showed that the economy is now estimated to have dropped by 7.2% from peak to trough, against a 6.3% fall previously recorded. That means that GDP in the first quarter of 2013 was 3.9% lower than its peak in the first quarter of 2008 - previously it was estimated to be 2.6% below.
So in a nutshell this means that the UK had fallen deeper into recession than previously thought, meaning we therefore have further to go to recover lost ground.
So what does all this mean for exchange rates? Well after the numbers were released, Sterling fell quite sharply against other currencies. This is due to the fact the economy is not as healthy as previously thought, and increases the chance of robust action from the Bank of England to combat the slump. I will go into more detail about what the BoE might do, and the effect this could have on exchange rates…
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New Bank of England governor takes over this week
This week the new governor Mark Carney takes of the helm of the Bank of England. So what does he have to look forward to? The economy remains trapped in the longest downturn for a century, the banking system is still broken, and the financial markets are in a febrile state. Interest rates have been at a rock bottom 0.5 per cent since March 2009 and £375billion has been pumped into the economy through quantitative easing to drive growth despite inflation remaining stubbornly above the 2 per cent target. A nice welcome then!
He knows the challenges he is facing, and he has already hinted that he will take robust action to return the economy to growth. This could mean, amongst other things, a re-start of Quantitative Easing.
If he does decide to add more to the £375bn already pumped into the economy, then the likelihood is that the Pound may weaken significantly, pulling exchange rates down. Of course he may decide instead to start raising interest rates, which may strengthen the Pound due to the better return on offer.
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First meeting for new Governor this week
On Thursday, Carney will make take his first meeting at the BoE’s rate setting Monetary Policy Committee, and it will be interesting to see how many of the 9 members vote for an increase in QE. We’ll have to wait 2 weeks to see who voted for what, but it will be interesting to see what Carney does in his first week in the job. I personally don’t expect QE, but it remains a possibility.
Protecting against adverse exchange rate movements
With so much volatility and uncertainty surrounding the UK and global economy, it’s impossible to predict where exchange rates will move. Let’s look at Pound/Dollar rates as an example: In the last month alone we have seen rates as low as 1.50 and as high as 1.57 – a fluctuation of nearly 5% in just a few weeks, meaning a typical purchase of $350,000.00 has differed in cost by over £10,000, clearly illustrating how quickly exchange rates can move, and the impact of these fluctuations on the cost of a currency purchase.
Against the Euro, we have seen rates between €1.13 and €1.23 this year alone. And nobody knows which direction rates will take for the remainder of the year. Some forecasts suggest more QE could weaken Sterling by between 10% and 15% which would mean exchange rates could tumble.
Other forecasts suggest an escalation of the EU debt crisis will weaken the Euro and rates will rise.
One thing is for sure, rates will not remain stable and any fluctuations can have a huge impact on how much your currency costs you. There are ways to take control of the market however, and not simply leaving things to chance and hoping rates will move the way you want them too.
To give you just a few examples: You could fix the rate now for up to 2 years, and only lodge 10% of the total to be converted now. This protects against the rate dropping. Alternatively you could place a ‘Stop Loss’ or ‘Limit’ Order, which automatically secures your rate if it rises above, or drops below, a pre-agreed level.
Click here to discuss how we can help you protect against rates falling.
So how do you go about getting the best exchange rates?
I can help you achieve commercial exchange rates up to 5% better than the banks, and you can also take advantage of my 10 years’ experience in the FX markets in help you decide when to fix a rate.
Whatever currency you need to buy or sell, why not take advantage of a free consultation with an expert currency broker. I can discuss your requirement, the forecasts and possible direction of your exchange rate, and explain the options you can consider. In this way you can make an informed choice on when and how to fix a rate, and not simply leaving things to chance. As I have said before, hope is not a reliable economic tool. Take action now, click below to send a free no obligation enquiry and take the first step to making the most of your currency.
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Every day economic data is released across the world, and is often the most common thing that affects exchange rates. Below I list the main data releases for the coming week that I think could affect exchange rates. For a free consultation on how these released could affect your particular currency requirement, send me a free enquiry now by clicking here.
Monday – Today we have various inflationary measures from Europe, which could dictate future interest rate movements. Staying in Europe, we have Unemployment numbers. In the UK we have Inflation data, and the new Bank of England governor Mark Carney takes over today. Over in the USA we will see Inflation and Construction data that may affect GBP/USD rates.
Tuesday – There are only 2 UK releases today Construction data and Retail Sales data. In Europe we have further inflation numbers. Further afield we have an Interest rate decision from Australia. The only other data of note is Factory Orders from the United States.
Wednesday – Starting in Australia today, we have Retail Sales and Trade Balance data. In the UK we have House Prices and Inflation data, along with a BoE report on Credit Conditions. Over in Europe its Retail Sales and more inflation numbers. In the USA today we have some unemployment numbers and Trade Balance figures.
Thursday – A very important day, as we have the BoE decision on Quantitative Easing and interest rates, and it will be the first meeting with the new governor at the helm. Whether he will make changes to interest rates or QE we will have to wait and see. Shortly after, the ECB make their decision on rates.
Friday – Sterling gets a day off today as there are no releases of note. It’s quiet in the EU also, with German Factory orders the only data of note. It’s all about the USA today – Unemployment, Non-Farm Payrolls and average earnings. Expect a volatile day for Pound/Dollar.
Labels: Bank of England, Best Exchange Rates, Mark Carney, Quantitative Easing