Tuesday, 5 April 2016

Why has the Pound fallen against the Euro today?

Despite the lack of any significant UK economic data today, Sterling has fallen again by almost a cent against the Euro, to the low €1.24's as you can see from the chart below:



What has caused the Pound to fall?


As mentioned above and in my post on Monday, there has been no real data of note from the UK today. So with a lack of economic figures being released, what has caused Sterling to drop? It's to do with risk sentiment, and there is little out there to settle the nerves of investors. The general feeling is that the economic performance of the UK has been poor and today Sterling has been sold off, weakening the UK currency.

The economy is slowing, and stock markets have also suffered today, showing concerns over both UK and global growth. If you look at the data over the last week, it seems that there are risks that the Pound could fall further still, as polls seem to suggest a swing towards a Brexit. The attacks in Brussels and the migrant crisis could well mean the UK votes to leave the EU, and this brings with it much uncertainty that could hurt the Pound, pulling exchange rates lower against other currencies.

GBP/EUR unlikely to return to €1.40 any time soon


It's worth noting however the currency GBPEUR level isn't actually too bad. When you compare to last year of course the rate was up at 1.40, but it's important to remember why it was that high. The Greek crisis & EU stimulus has weakened the Euro making it cheap to buy. Also, the UK economy was performing well and everyone thought the BoE would be raising interest rates, pushing the Pound higher. €1.40 was the highest the rate had been in almost a decade.

The global economy has changed since then however. Global growth is down, the Euro is now seen as a safe haven currency, and the UK economy has slowed meaning the BoE are years away from hiking rates. These factors need to be noted, as it's not just the referendum that has caused the drop in the value of the Pound. Even if the UK vote to remain in the EU, don't expect rates to shoot back up to where they were last year.

Look back at the charts and you will see the current GBPEUR rate is actually where it was at the start of last year, and at the time that was a 6 year high. So in context, a rate of around €1.25 is actually pretty good. It's simply corrected back to where it was, and if we leave the EU, then it's likely to fall much much further.

If you need to exchange currency, get in touch to discuss your options


Simply watching the exchange rate drop away and hoping it will bounce back is not a reliable economic strategy. There are however steps that you can take to ensure you don't get a worse exchange rate than is necessary. For example, those that need to buy Euros can lock in the current rate for up to 2 years using a Forward, by lodging a 10% deposit. This protects you against a further drop in the rate and allows you to budget.

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