Wednesday, 11 December 2013

Why has Sterling fallen into the €1.18's? Will it recover?

Wednesday 11th December 2013 
Sterling has been falling today, and exchange rates have dropped further from recent highs. In today’s post I’m going to examine the reasons why the Pound has dropped, and also give my views on where rates may head for the remainder of 2013. If you need to buy or sell currency in the near future, you're in the right place, so read on...

On Tuesday we actually saw rates rise slightly on the back of Bank of England governor Mark Carney’s comments on the economy, but the gains were short lived, and today rates have steadily dropped. So before we look at the reasons for today’s fall, let’s examine what happened yesterday. 

Pound rises on Tuesday, but not for long... 

The Pound hit a 2.5 year high against the US Dollar and also rose against the Euro yesterday, after upbeat comments from the Bank of England, and also strong house price data. These were taken as signs that interest rates in the UK could rise sooner than previously thought. Higher interest rates strengthen a currency as it provides a better return for investors. 

Bank of England Governor Mark Carney's commented earlier in the week saying that the economic recovery is showing signs it can reach self-sustaining momentum, although he also said monetary policy will need to remain exceptionally loose for some time. This caused slight gains through trading on Tuesday. 

Also recent data out of the UK showed slightly stronger than forecast industrial output data while the National Institute of Economic and Social Research released figures yesterday showing the economy grew an estimated 0.8 percent. 

Why has Sterling fallen against the Euro today? 


As you can see from today’s chart below, the Pound has fallen against the Euro and has dropped into the €1.18's; several points down from the highs of €1.21 we saw last week. 


So why was this if UK economic news is good?

There are a number of reasons the Pound has fallen today. We haven’t seen any significant economic data releases, and I thought today would actually be quite uneventful. However we have seen UK gilt yields fall which has caused the Pound to fall slightly against other currencies. 

The main reason GBP/EUR rates have fallen however is due to events in the Eurozone. I have read reports today that there is very tight liquidity in the euro zone, and European banks have been repatriating funds to shore up their capital bases for an ECB asset quality review. What this means is EU banks have been buying Euros, and the demand has strengthened the single currency, making it more expensive to buy. 

Also the European Central Bank's reluctance to cut interest rates any further has also helped the euro make gains, pulling GBP/EUR rates down into the €1.18's.

So what next? Will the Pound fall further or recover to €1.20? 

I personally feel this is a temporary dip. The reason rate were as high as €1.21 was speculation on interest rate cuts in the EU, that now seem much less likely, and the exchange rate has corrected itself accordingly. In the medium term I expect rates to break back above €1.20 although possibly not until next year. This of course depends on continued positive economic news from Britain. 

So for those needing to convert Euros to Pounds, I would consider taking advantage of the 2 cent move in your favour. You can fix the current rate for up to 2 years even if you don’t need your currency for some time. 

If you are buying Euros, I expect rates to recover. However this may take some time, so whether to hang on or not depends on how long you have until you need your Euros. It took repeated attacks on the €1.20 level before we broke through last time, and I expect the same. A Stop Loss order is useful in these conditions. 

If you have found my insight useful and are looking for the best rates, or want to discuss which way the rate is moving and would like to discuss how I can assist you, click below to send me a free enquiry today. I provide exchange rates up to 5% better than banks can offer, and have over 8 years’ experience in the currency markets. 

Click here to send me a free no obligation enquiry. 

Alastair Archbold