Wednesday, 24 August 2016

Pound continues to rise against Euro

The Pound continues to make gains, and currently sits at around €1.1750 against the Euro, and $1.3240 against the US Dollar (a 3 week high). It is welcome news for those with Sterling to convert to other currencies, as the latest data suggests that the UK economy is holding up surprisingly well following the EU referendum a few months ago. Here’s how the Pound has performed against the Euro so far this week:


Why is the Pound rising, and is it set to continue? 


In the last week or so, Sterling has been given a decent lift following Inflation figures and retail sales that were much better than expected. Yesterday, figures showed that manufacturing exports hit a 2 year high, which of course is probably due to a weaker Pound making our goods more attractive to overseas buyers. I don’t think we should read too much into the recent figures however, as the current weakness in Sterling is a double edged sword; it benefits exporters but also pushes up costs and prices.

While I think that while the UK will avoid another recession, most experts agree that it is likely that it’s set for a sharp slowdown. Small positive snapshots such as Retail Sales and Exports don’t mean that the economy has brushed off ‘Brexit’ and is on course to recover. As further figures are released in the coming weeks and months, we’ll start to be able to build a much clearer picture of how the economy is faring, and there is a good chance that Sterling will continue to lose value. At the moment, it’s just treading water as investors wait for more information to influence its direction.

To buy or not to buy? 


For those needing to convert Sterling to other currencies, the recent gains are a positive however as I’ve alluded to above, there is a very big risk the Pound will fall further. Also, when you remove the blinkers and look a little wider than the UK’s current position, other factors are in play; the world is a big place and other things influence exchange rates too. Take developments in Europe for example that may halt any further gains in the rate. Business growth data in the Eurozone is better than expected rising to a 7 month high, and this means that there’s less chance the European Central Bank (ECB) will cut interest rates or extend its QE stimulus in its meeting next month. This could give the single currency a little strength, making it more expensive to purchase and hinder any further gains in the rate. HSBC think GBP/EUR rates will hit parity!

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What about those with currency to convert back to Pounds? 


If you have Euros or another currency to convert back to Sterling, then don’t forget that you have gained significantly due to a weaker Pound. Converting €300,000.00 back to Sterling today nets you more than £30,000.00 more than a few months ago. The Pound may weaken further, but at the same time perhaps the Daily Express is right; the UK will have a ‘Brexit Boom’ while the rest of the EU crumbles, and GBP/EUR soars back to €1.30+ by the end of the year, as recently forecast by Barclays. I do believe the economy will prove resilient and Sterling will, in time, recover. However I think that it’s unlikely it will do so in the short to medium term.

The point I’m making is that nobody knows which way exchange rates will move as illustrated by the wildly differing forecasts by major UK banks, with some say it will drop to €1.00 for a Pound, and others stating it will rise to €1.30. Any private or business clients that are exposed to the currency markets need to have a sound strategy to deal with whatever eventualities the market throws at them.

If GBP/EUR falls to parity, can you still afford to buy your villa in Spain? If you’re a business that exports to Europe and the rate climbs back to €1.30, how would that affect your sales and income?

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