Thursday 21st February 2014
It's been a relatively quiet week, without much volatility since my last post. We did see the Pound weaken slightly yesterday, when the latest unemployment figures were releases. While pretty good overall, the total number of 7.2% was slightly worse than analysts had been expecting, and Sterling fell a little as a result.
Today however we rates recovered, and at the time of writing GBP/EUR is at 1.2142, and GBP/USD at 1.6655 - both very good buying levels.
In today's post I'm going to have a look at some other events that have happened today that I think could cause the Pound to drop away from the recent highs...
George Osborne warns recovery is 'not secure'
The UK's economic recovery is "not yet secure", Chancellor George Osborne has warned, ahead of next month's Budget. It comes after the Bank of England upgraded its UK growth forecast for 2014 from 2.8% to 3.4%.
Experts have raised concerns that improvements are too dependent on consumer spending. The Chancellor added that “Britain is not investing enough. Britain is not exporting enough.”
This last point is key, as to export more would ideally mean a weaker Pound to make our goods cheaper overseas. This could mean the Bank of England try to 'talk down' the Pound in order to try to lower exchange rates.
Interest Rates not likely to rise this year
Martin Weale, an external member of the Monetary Policy Committee (MPC), has today suggested the Bank will not rates this year. "I think it is very helpful if we try and explain that the most likely path for interest rates is that the first rise will come perhaps in the spring of next year,"
The main reason the Pound is so strong at the moment is that many analysts thought the recovery would mean rates rising this year. (Higher interest rates attract investment into a country and therefore strengthen its currency.)
The fact that rates will now be left on hold for some time yet is in my view the reason exchange rates have stopped rising. Coupled with the risk of a devaluation of the Pound to help our exports, mean that the current levels could be a peak.
If you look at recent charts, you will see that we have got to these levels several times in the last few months, before it drops back away again every time. We haven't seen rates break significantly higher, so the current levels may be the peak.
How can you protect against rates dropping?
It's impossible to predict where the exchange rate will go of course, but if you need to convert Sterling to Euros in the next 12 months, the current rate is near the best in a year. You don't want to lose out on this should we see the market drop away again.
You can protect against rates moving against you in 2 ways. Firstly, you can lock in today's exchange rates for up to 12 months, and only lodge 10% of the total you want to convert. This protects you against a fall, allows you to budget effectively, safe in the knowledge you're fixing at a 12 month high
Alternatively if you wanted to gamble on rates improving further, then placing a 'Stop Loss' order allows you to have a safety net in place should your gamble not pay off. This works by placing a lower limit (1.18 for example), and if the market drops to this, we automatically secure your currency. This means you can still take advantage of any gains, but aren't leaving yourself open to ending up with a much worse rate of exchange unnecessarily.
Click here to find out more about Forwards and Stop Orders.
How to get the best exchange rates.
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Labels: Best Exchange Rates, Economy, Forward Contracts, Interest Rates, Stop Loss Order, Will Pound/Euro rates fall