Tuesday 5th November 2013
Good afternoon. We have seen Sterling continue to strengthen this week, and exchange rates are now very close to the best they have been all year. The main reason for the increase is the strongest services sector growth since 1997.
In today’s report I’ll look at the reasons for the gains in detail, have a look at some other important data releases due this week, and also my view on the forecast for Sterling exchange rates for the remainder of 2013. So in today’s report:
- UK Services sector growth pushes Pound higher
- Eurozone continues to slow, weakening the Euro
- EU Commission however predicts Euro could gain strength
- Forecast for Pound/Euro rates for 2013
- This week’s economic data release that could affect rates
UK Services sector growth pushes Pound higher
This morning we saw figures that show activity in the UK services sector last month increased at its fastest rate in 16 years. The news has caused the Pound to surge in value against other currencies, breaking through the €1.19 level against the Euro, close to the highest it has been all year.
The numbers showed that the PMI services index rose to 62.5 in October from 60.3 in September, beating forecasts of 59.8. The reading signals that the UK economy is firmly on track to recovery, and could lead to the Bank of England revising up its quarterly growth forecasts.
Alongside strong activity in manufacturing and construction, the results indicated quarterly economic growth of 1.3%, up from 0.8% between July and September this year.
The gains today follow a rise in rates we saw towards the end of last week after we saw poor economic numbers from the Eurozone. Last week the GBP/EUR mid-market rate was in the mid 1.16’s, so we’ve seen the exchange rate rise over 2% in just a few days.
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Eurozone continues to slow, weakening the Euro
Another reason for the gains in the last few days is the Euro weakening. The single currency fell to a one-month low against sterling today, amid speculation the European Central Bank may signal easier monetary policy or even cut rates this Thursday.
After data last week showed a sharp drop in euro zone inflation, some in markets expect the ECB to cut borrowing costs on Thursday, or at least lay the ground for a move. I mentioned this in my last post, and further weak EU data could increase the chance of this happening. It is this speculation of a rate cut that is being priced in to exchange rates now, and caused GBP/EUR to go up.
EU Commission however predicts Euro could gain strength
Despite the facts of the last few days, according to the European Commission, the euro will appreciate at a record pace this year and continue to gain in value in 2014. If what they are predicting holds true, then it could mean the recent gains in GBP/EUR rates will be short lived, as a stronger Euro would be more expensive to buy and would therefore cause exchange rates to fall away.
The Commission cautioning that it sees the single currency making further gains should be noted however as it could reverse the current trend.
Forecast for Pound/Euro rates for 2013
So what everyone wants to know is will the rate continue to go higher, or will it be short lived and come back down again? I should first point out that nobody can predict which way exchange rates will move.
I have worked in the industry for over 10 years however, and while I can’t forecast rates into the future, I can explain what is moving the rate, and what I think may happen in the coming weeks and months. So below I will outline some possible scenarios for you to consider. The examples below are for Euros, but we do trade all major currencies so get in touch today to discuss your specific requirements.
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If you are buying Euros
Rates are very close to an all year high. I personally would do one of 2 things: If I thought the rate was as good as it’s going to get, then I would fix the rate now with a Forward contract. This means you can lock in the current rate for up to 2 years, and only lodge 10% of what you want to convert now.
You send the remaining 90% when you want your currency delivered. This strategy allows you to budget effectively, and protects against the rate moving against you.
If I thought the rate would go higher, then I would place a ‘Stop Loss’ order. This means if the rate falls below a pre-agreed level, your currency is secured. If the rate continues to rise however, then you can take advantage of any gains. This gives you a worst case scenario should the market drop.
Personally we might see rates rise another point or so at best, but any good news from Europe could quickly wipe out the gains. I would give serious consideration to fixing rates now while they’re so good. Remember; holding out for an inch could mean losing a yard.
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If you are selling Euros
You will have seen the rate move significantly against you and may be worried if this will continue. If I were selling Euros, I would also use a Stop Loss order. I would place this at a level a few points above where the market currently is. In this way you’re limiting your losses should the current trend continue.
If we see rates start to drop back again however, as the European Commission seem to think they will, then you can take advantage.
Get in touch to discuss your requirements in detail
The above are only a few examples to show the type of strategies you can employ by taking advantage of the type of contracts we offer. Everyone’s individual requirement will of course be very different, in terms of currencies, volumes and timescales.
Click here to send me a free no obligation enquiry today, and I can get in touch to discuss your currency needs in detail. In this way you can gather all the information necessary to decide what to do. When you decide to fix your rate, you will find that our rates are up to 5% better than banks can offer, so fill in the enquiry form now to find out more.
This week’s economic data release that could affect rates
As I pointed out in a recent post, economic data releases can have a huge impact on exchange rates, and that’s exactly what has been the case in the last few days as I’ve outlined above.
So what have we got this week?
Wednesday - we have manufacturing numbers from the UK in addition to a GDP estimate. Both will be a crucial indicator of growth so expect it to affect the Pound. We also have a host of data from the EU, that if poor could weaken the Euro further.
Thursday – Interest rate decision from the UK and EU today. No change expected for the UK, but an outside chance of a rate cut from the ECB. Also watch for the press conference after the decision – if they don’t cut rates, they may hint they will soon, which would have the same effect. Elsewhere we have unemployment numbers from the USA.
Friday – we end the week with Trade Balance figures from the UK, France and Germany. Over in the USA we have the latest non-farm payroll numbers. These are usually very different than forecast, so expect a choppy day for GBP/USD rates.
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I look forward to hearing from you.
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