Tuesday, 18 October 2016

Pound rises to €1.12 vs Euro

The Pound has risen today. This is not a mis-print. Sterling has actually managed to make some gains against other currencies. GBP/EUR has risen by a cent to around €1.12, the highest it's been since the flash crash.

Why has the Pound gone up against the Euro?


There are 2 reasons that Sterling has risen today. Firstly, it seems that the high court challenge regarding invoking article 50 was, as I expected, a waste of time. The Lawyer for the government said today that it's highly likely parliament would have to ratify any Brexit deal with the UK. If the challenge had been successful it could have created even more uncertainty surrounding Brexit, so it has brought some clarification to the process, and given the Pound some support.

The second reason for the rise is the fact figures today have shown that inflation is up to 1%, the highest it's been in 2 years. This is a result of the weak pound pushing up import prices, that are now starting to feed through to goods. The reason the Pound has risen is because higher inflation usually leads to higher interest rates. While I don't think the Bank of England are likely to raise rates any time soon, it does mean that it's unlikely a further cut is on the cards. It also makes the BoE look like they acted a little prematurely in cutting rates earlier this year, as economic figures from the UK actually show an economy proving to be resilient to the effects of the referendum result. Less chance of a further cut in interest rates mean a stronger currency, hence the gains for Sterling today.

Will Pound keep rising?


We'll get further economic figures from the UK tomorrow in the form of the latest unemployment and jobs figures. However even if data continues to impress, I don't think this is the start of a rally for the Pound. The UK current account deficit is at record highs and this is likely to keep the Pound low. And of course the uncertainty caused by Brexit hasn't gone anywhere, and is unlikely to do so in the short to medium term.

Any clients hoping for GBP/EUR rates to rise should look to problems in the EU. There is interest rate and stimulus decision on Thursday from the European Central Bank, and if they hint at further measures being necessary to stimulate the economy then the Euro might weaken, pushing GBP/EUR higher. Even if the Euro weakens further however, it's likely any gains for GBP/EUR will be limited as Brexit pins Sterling firmly to the ground.

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