Thursday 9th September 2014
After
falling earlier this week, GBP/EUR rates recovered slightly yesterday due to a
weaker Euro. Let’s first look at why rates fell. It’s all to do with inflation,
and the impact this has on when the Bank of England (BoE) will raise interest rates. As regular readers will know, the speculation
on interest rates going up has been the driver behind the Pound’s appreciation
this year, as higher rates strengthen a currency due to the better return on
offer for investors.
However inflation in the UK is now easing which could allow the central
bank to keep interest rates low. This is what has cause the Pound to drop away
this week. Indeed yesterday the BoE’s Monetary Policy Committee (MPC) decided again to hold UK interest rates at a record low of 0.5% which was not a
surprise. Nor was their decision not to extend its quantitative easing
programme beyond the £375bn already spent. In two weeks, the Bank will reveal
how members of its rate-setting committee voted on the rates decision. Last
month, two members voted for a rise.
Yesterday afternoon the European Central Bank’s (ECB) president Mario
Draghi gave a speech which you can read in full here. There was nothing
new in his comments however, and due to this there was little to no market
reaction.
Will Pound/Euro
rates go up or down?
It is of course impossible to predict market movements, but looking at
the pattern over the last few months, Euro buyers should give serious consideration
to fixing rates while they are still close to a 6 year high. There is nothing
to suggest rates will break higher given they have failed to do so for many
months. Supporting this view is Peter Kinsella, currency strategist at
Commerzbank who said yesterday that "A lot of the good news has already
been priced into the pound," indicating many analysts think the Pound has
run as high as it can. Chancellor Osborne also warned yesterday that Britain’s recovery is
at risk from a new EU recession.
FED Comments weaken US Dollar
GBP/USD rates have dropped from $1.72 to below $1.60 in
recent months; however this week has clawed back some losses as the chart below
shows, settling comfortably above the $1.62 market. The pound had surged more
than 15 percent against the dollar in the year to mid-July on expectations the
BoE would raise interest rates before its peers in the United States and
Europe.
But it has fallen almost 7 % in the last three months as
expectations of a rate hike by the end of 2014 faded.
The latest nonfarm payrolls released last Friday had led me
to believe the Fed might hike interest rates sooner rather than later, however
recent FED minutes this week quashed any chance of that, and suggested the
central bank was in no such hurry. This weakened the USD slightly pushing rates
higher.
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Labels: Best Exchange Rates, Euro predictions, Pound/Dollar, Pound/Euro, When to Buy Euros