Wednesday 28th May 2014
The Pound has fallen quite a bit today against both the Euro and the US Dollar. GBP/USD is now sitting at a 6 week low of $1.67, which is the biggest one day fall in 4 months. GBP/EUR has fallen to a 1 week low of €1.2288.
Why has the Pound fallen?
The currency markets move mostly on rumour. As regular readers of my blog will know, there has been much speculation UK interest rates will be going up at some point, and this has been driving the Pound higher as it gets priced into the market.
However recent data such as this week’s poor Retail Numbers and Mortgage Approvals mean that the market is now paring back some of the more aggressive bets that the Bank of England could begin raising interest rates later this year. It now looks more likely to be next.
These over-extended bets on sterling appreciation seem to have run out of steam. I have been pointing out in recent weeks that the market has got to the recent highs several times only to fall back away again, and this is exactly what we have seen happen again.
Many clients took advantage of our ‘Stop Loss’ orders to protect against exactly this kind of thing, so those that have taken the opportunity to discuss their requirements with us have avoided losing more than necessary. Those that simply watched and hoped the market would keep going up will be disappointed. Don't just hope things will move in your favour; hope is not a reliable economic tool. Take control of your currency requirement by discussing your options with an expert currency broker.
So which way may the exchange rate go next?
Financial markets still widely expect the BoE to be the first major central bank to raise interest rates but I think this is now very widely priced into the rates we already see.
The next thing of major importance is next week’s ECB meeting, which could reveal a combination of policies to tackle low inflation and low credit growth. The key will be the timing of any stimulus if they decide to do any. If they are very aggressive in any stimulus measures, GBP/EUR will probably go back up. If however they are not specific and the markets don't think action is imminent, we could see the rate fall further still.
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