Thursday, 12 February 2015

Pound surges to €1.3560 after Inflation Report

Thursday 12th February 2015 
We have seen the Pound surge higher today on the back of the Bank of England’s Inflation report. Pound/Euro rates climbed from 1.3410 to a peak of 1.3560, a new 7 and half year high, before settling back down towards €1.35: 


 

Pound/Euro rates up on Inflation report 


I’m actually quite surprised that the Pound moved so much this morning. In the report, the Bank of England governor stated that inflation in the UK could temporarily turn negative later this year due to the drop in the price of oil, and normally falling inflation would weaken a currency. However he went on to say that for the next few years, growth could be higher than expected at 2.9%. I think it’s this upward revision that caused the Pound to rise because of falling oil prices. 

It also said it sees little need to raise interest rates this year (again, something you would normally expect to weaken a currency) and could even cut them if inflation proves weaker than expected. However it seems that the markets interpreted the report as keeping on track an expected interest rate rise in about a year, in early 2016. 

Asked about concerns about Greece leaving the Eurozone, Mr Carney said that the risks were not as great as they were three years ago, but that a Greek exit would have an impact on the Bank's forecasts. 

What does this mean for Sterling/Euro rates? 


I think this is a temporary spike. We have seen the rate hit similar levels just this week; however they did not last long and the rate dropped away quite quickly. With the UK election likely to cause uncertainty and Sterling weakness, I think the Pound will struggle to go much higher this year. 

We also have the situation in Greece and the EU. On the one hand, further problems could weaken the Euro and caused the rate to climb higher. On the other hand, when the EU’s QE measures start to take effect, this could cause the Euro to regain strength and bring rates down. Also, don’t automatically assume more bad news from Europe will cause GBP/EUR to keep rising. Yes it could weaken the Euro, but as our largest trading partner, this could well drag Sterling down at the same time. 


When should you fix your exchange rate? 


There are various options available, depending on which currency you are converting and the timescales you are working to. Why not get in touch with me to discuss these options and obtain a quote for your exchange. I can usually provide exchange rates much better than banks and other brokers, and by having a detailed chat about what you need to do, you can make an informed decision on what course of action to take and when to fix your rate.