Wednesday, 19 March 2014

Pound/Euro exchange rate forecast for 2014 changes after BoE comments

Wednesday 19th March 2014
It’s been a very busy day in the markets today, with UK Unemployment being released, along with the Bank of England minutes, a speech by governor Mark Carney, and of course the budget statement. This afternoon I will look at the effect each event had on exchange rates, and how this has affected my view on where rates are headed. 

First, let’s look at today’s GBP/EUR chart that reflects how exchange rates were affected: 


Mark Carney warns against strong Pound 

As you can see from the chart above, as soon as the market opened at 8am this morning, the Pound started to strengthen as I predicted it would yesterday. This was due to comments last night by BoE governor Mark Carney, in which he said the current low interest environment won’t be around forever. This gave the Pound strength on speculation of interest rates going up. 

It didn’t last long, and as you can see from the chart above, when the MPC minutes were released, it shows that many of the BoE members are concerned about a strong Pound. Sterling strengthened by 1.5 percent in the month running up to the March MPC meeting, hitting its highest in several years, but in the last week or so has weakened to the lowest it’s been all year. 

The MPC members noted the further strength in sterling, with Deputy governor Charlie Bean recently saying the BoE could keep interest rates lower for longer if sterling strengthens much more, adding that its current level was "fine". Another member recently said that that further strength in sterling would be a worry. 

What does this all mean? To me this means if you need to buy Euros at the best exchange rate, the current levels could be as good as it's going to get for some time.

UK Unemployment 

The latest Unemployment figures were released at the same time, and while the overall rate remains at 7.2% as I expected it would, the number of overall people in employment hit record highs. This did little to help the Pound, as all focus was on the BoE warning against the Pound getting stronger. 

UK Budget Statement 

As I predicted, it had absolutely no effect on exchange rates. Here I will only look at what could affect currency – basically Growth forecasts were up a little, and we’re getting a new Pound coin. Yay.

Look at the chart above, and you can see the markets were, as usual, underwhelmed by the Budget, with the Pound barely moving at all throughout the speech. The rest was mostly guff, and if interested you can read a full report on the budget here on the BBC site.

What does this mean for those looking at the best exchange rates? 

I have changed my view since my forecast yesterday. I now think it will take a few months before we get back through €1.20, in light of the BoE warning about the Pound getting stronger as I've outlined above. If I needed to buy Euros I would look to fix a rate now, or put protection in place against adverse movements.

They have hinted that they won’t let the rate get too much higher, so if you need to buy or sell Euros, consider doing something sooner rather than later. I don’t think it will drop much either due to the economy being fundamentally strong, so for the next few weeks I expect rates to remain range bound between 1.19 and 1.20 

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