Pound/Euro rises above €1.20 after ECB cut interest rates

Thursday 7th November 2013
Good afternoon. A short while ago, the European Central Bank (ECB) has surprised the markets, and cut the interest rate to 0.25%. This has caused significant weakness in the Euro, pushing GBP/EUR rates above €1.20 which is now the highest we’ve seen all year.

ECB cuts interest rates – Pound/Euro rates best all year

There were rumours that the rate would be cut, but most analysts didn’t expect it to happen this month – me included! The result is that the single currency has weakened significantly, and become cheaper to purchase.

As you can see form the chart above, the moment the announcement was made, the GBP/EUR rate shot up from €1.19 to €1.2025, before settling down at the benchmark level of €1.20.

You can read more about the cut, and the comments made by the ECB president here on the BBC website. The reason the rate has risen, is that a lower rate of interest means less return for investors. These investors have therefore sold the Euro off in huge volumes, and simply supply and demand means that more of something means it’s cheaper – the Pound/Euro rate has risen as a result. 

The gains were short lived however, as is often the case. The market did not last above €1.20 for very long, and already rates have dipped just below this level.

As €1.20 is a key benchmark rate, when the markets hit this level it triggered many orders to buy, which temporarily drove it higher. The market has now stabilised just below this level, and I don't expect rates to get back above this level again in the short term.

Do you need to buy Euros?

Take note that this is around the best levels we have seen all year. If you need to buy Euros in the next 6 months, it’s worth considering fixing the rate now with a ‘Forward Contract’. This means you can fix today’s rates for up to 2 years into the future, and only lodge 10% of the total you want to convert. You retain the other 90% until you want the Euro to be transferred.

In this way, you are protected against the rate dropping back away, and allows you to take advantage of the current levels even if you don’t need your currency for some time.

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Pound/Dollar rates drop away.

In contrast, the news from Europe has caused Pound/Dollar rates to drop.

As you can see from the chart above, the movement is directly inverse to the GBP/EUR rate. Why is this? It’s because the investors that have been dumping the Euro, have moved to the safety of the US Dollar, which often happens when there is uncertainty in Europe. It’s then the simple supply and demand I mentioned above – as so many are now buying Dollars, it’s becoming more expensive to buy and therefore GBP/EUR rates are dropping.

Are you looking for the best exchange rates?

I hope you have found my blog useful, in keeping people abreast of what is happening with exchange rates, and the reasons for movements.

The company I work for can source exchange rates up to 5% better than the banks can offer. This combined with the expert market knowledge I have of the currency markets, could mean savings of thousands of Pounds on your currency transfer.

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Alastair Archbold

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