Tuesday, 5 January 2016

Will Pound/Euro rates go up or down in 2016?

The Pound has made a slight recovery against the Euro since yesterday, rising into the mid €1.36's. This was in part due to much worse than expected German inflation data, which was way below the forecast. As such, the Euro weakened and became cheaper to buy. You can see the 1 cent gain in the rate over the last 24 hours in the chart below:


Despite the slight gain, the GBP/EUR rate is of course still significantly lower than the 8 year highs we saw of €1.40+ towards the end of last year. Many of you reading my blog want to know whether the rate wil recover back to these levels. It is of course impossible to predict exchange rate movements, however with an insight into the kind of things that can move the rate, you can make an informed decision on what action to take. Let's take a more detailed look at what 2016 may hold in store...

Will the Pound/Euro rate go up or down in 2016?


Before I tackle this question, we first need to look at the following points:

  • Why did GBP/EUR exchange rates reach an 8 year high of €1.40+?
  • What caused the sharp fall down to €1.35 over the last month?
  • I can then give my view on the forecast for GBP/EUR in 2016 

 

Why were GBP/EUR exchange rates reach an 8 year high of €1.40+?


The UK economy performed well in 2015 and there was much speculation interest rates would rise. This kept the Pound strong. The Euro was weak due to the issues in Greece and the lack of growth, and these 2 factors were the reason for rates reaching an 8 year high last year of €1.44. 

What caused the sharp fall down to €1.35 over the last month?


Lots has changed in the last few months however. The Bank of England have postponed a rate hike until probably 2017, and this has weakened the Pound. The global economic climate is also having an impact, with slow global growth and record low oil prices all likely to hinder the UK recovery. Over in Europe, the European Central Bank are now taking steps to stimulate the economy, which could well have the desired effect of returning the EU economy to growth. This has given the single currency some renewed strength, and that's why it's now more expensive to purchase.

In 2016 what could affect Sterling/Euro exchange rates?


I think that an interest rate hike is now off the cards for the whole of this year.  Also as I touched on earlier, global growth concerns are going to have an impact on UK growth. However I think by far the most important factor to consider in the short to medium term, is the UK referendum on whether to remain in the EU, dubbed 'Brexit' in the media.

The Brexit issue in my view is going to have a huge destabilising effect on the Pound in the coming months. If you remember when the UK voted on Scottish independence, the uncertainty this created caused the Pound to lose a significant amount of value, causing exchange rates to drop. I think that the risk of a Brexit is a much much bigger issue, and nobody has even started to outline the main arguments 'for' and 'against' as yet. Remember that the Prime Minister has promised to hold an in/out referendum by the end of next year, and currently there is an expectation of a vote as early as this June. As we get closer to the Brexit vote, we could see a significant drop in the value of the Pound as uncertainty gives the markets the jitters and investors dump the Pound.

Do I think Pound/Euro will go up or down in 2016?


My personal view is that in the longer term, we'll see rates recover to back above the 1.40/1.45 mark by the end of 2016. However in the short to medium term, uncertainty will drive Pound/Euro as low as 1.30 before we see this recovery.

If you need to buy Euros in the next 6 months, what are your options?


As I've stated above, nobody can predict where the exchange rate will be in a week, or a month from now. You do however have various options you can consider, all of which are preferable to just looking at the rate every day and hoping it will go up. Here are some examples:

  • Fix a rate on your currency now. Even if you don't need your Euros for up to 2 years, you can fix a rate now using a 'Forward Contract' by lodging 10% of the total to be converted. This protects you against a drop, allows you to budget, but you can't take advantage if the rate goes up.

  •  Hedge your bets. Fix a rate on a portion of what you will need, 50% for example. This reduces your exposure considerably, protects against moves in any direction, and still allows you buy the remainder if the rate then goes up.

  • Use Stop Loss/Limit Orders. These allow you to have your currency automatically bought if the rate hits a level higher than the current market (limit) or if it drops below a particular point (Stop Loss). These are useful in helping you to budget, and can be used in conjunction with Forward contracts.

Discuss your currency requirement and get a quote


If you need to buy or sell Euros, or indeed any major international currency, then why not get in touch for a quote and to discuss your particular requirement. The company I work for is one of the largest independent UK currency brokerages with an annual turnover in excess of £300m. The rates of exchange I can provide are up to 5% better than your bank or existing broker may offer you, and as such I regularly save clients thousands of pounds by achieving the best exchange rates.