Posts

Showing posts from June, 2017

Interest Rate Co-ordination and effect on exchange rates

For the past month Pound/Euro rates have been stuck in a range half a point either side of €1.1350. The last week has seen a little more volatility, with mixed messages from central banks whipsawing the rate as low as €1.1250 before recovering yesterday back to the level it’s been comfortable at for some time.

Much of the Pound’s woes of late have been caused by political uncertainty caused by the general election. There now seems to be an air of stability with the Conservatives having formed a minority government, and so the past week saw focus shift from politics to news from Central banks.

Interest Rate Co-ordination? 
Having worked in foreign exchange since 2006, I can say that historically, interest rate movements used to be one of the main things that affected currency prices. Since the financial crisis however, interest rates have remained fairly stagnant. In 2007 rates were as high as 5.75%, however just 2 years later they were at 0.5%. In early 2009 we saw a global, co-ordina…

Sterling/Euro rates volatile

Image
It's been an interest 24 hours for GBP/EUR rates as the graph below illustrates:


As you can see, rates slipped from €1.14 to as low as €1.1260 earlier today, only for it to shoot back up to €1.14 again.

Why has the GBP/EUR rate been so volatile?
The reason it shot back up is the same reason it dropped in the first place; comments from Central Bank chiefs. Yesterday the ECB hinted that they would be scaling back their stimulus measures, as outlined in my post yesterday. This caused the Euro to continue gaining strength this morning. Then in a statement today, they said that markets had got it wrong and actually, further stimulus would be needed. I thought it contradictory and rather odd, but it's probably the case that they didn't want the Euro to strengthen too much, and I think that's why they corrected themselves today. Given how the EU economy is faring, it is likely that they will reign in their stimulus measures later this year, so the Euro will probably strength…

Central Bank comments affect exchange rates

Image
Pound/Euro rates have fallen to €1.13 today, due to a combination of the Pound getting weaker, and the Euro getting stronger and therefore more expensive to purchase.

(View live currency graphs hereto see how rates have moved over recent weeks and months.)

Euro gains strength after Mario Draghi comments
It started when the ECB President, Mario Draghi, said that they may well start to taper their stimulus programme. At the moment they have zero interest rates and huge Quantitative Easing programme in order to stimulate the economy. His comments suggest that some of this stimulus may be scaled back due to improving economic conditions in Europe. His comments caused the Euro to gain against other currencies, including the Pound, pulling GBP/EUR rates down to €1.13.

Pound weakens after Mark Carney comments
The Bank of England governor, Mark Carney, also spoke today, and said that the central bank would be tightening capital controls on banks. In effect this means less consumer lending and …

Pound fails to gain despite DUP deal

Image
A deal has now been done with the Conservative government and the DUP. The news has helped the Pound rise a little but not by much, as the deal was widely expected and already priced in to the market for the most part. As you can see from the chart below, Pound/Euro rates have been stuck in a range between €1.13 and €1.14 for the last few weeks:


The rate would be much lower if it wasn't for hawkish comments from some Bank of England members last week, suggesting an interest rate hike may be on the cards later this year. If they do raise interest rates from their record low of 0.25%, then it's likely that the Pound would rise due to the higher return on offer for investors.

Sterling unlikely to move much higher due to Brexit uncertainty
We're not expecting Sterling exchange rates to rise in the short to medium term however. Recent economic data has been pointing to a slowdown in the economy, and if this continues to be the case, then it's less and less likely the BoE wi…

Pound/Euro rate rises to €1.14

Image
Pound/Euro rates have staged a recovery today. Initially we saw the pair drop through the morning to as low as €1.13, however just before midday it started rising, and has now levelled off at €1.14 as the chart below illustrates:


Why did the Pound/Euro rate rise to €1.14?
Interest Rates. Yesterday we saw the rate drop when the Bank of England governor Mark Carney said that now was not the time to raise interest rates, and this weakened the Pound and the GBP/EUR rate dropped. Today however, the Bank of England's Chief Economist Andy Haldane said in a speech that he would back a rise in interest rates later this year. This helped the Pound gain as investors purchased Sterling in the hope of a better return should rates indeed rise.

It's a welcome gain and a reversal of the drop we saw tomorrow, and GBP/EUR is now back at the level it has seemed comfortable in of late at around the €1.14 mark.

Looking to make a large transfer to Euros or another currency?Click here to get a free…

Pound falls but remains relatively flat vs the Euro

Image
Pound falls on Interest Rate News
Sterling/Euro rates have slipped to the lowest we've seen for a week or so, after the Bank of England governor said this morning that they would not be raising interest rates any time soon. There had been some speculation that they would look to increase the base rate due to rising inflation.

2 members of the BoE's monetary policy committee did vote for a hike last week, but the majority decided to keep rates on hold. It's probably the case that due to slowing wage growth and concerns about what effect Brexit would have on the economy that swayed their decision.

With interest rates likely to remain at a record low of 0.25% for the foreseeable future, the Pound fell due to the fact only a very low return is on offer for investors.

Political Uncertainty & Brexit
Elsewhere, 10 days after the election Theresa May is still to formally announce that they will form a government with the backing of the DUP. Brexit negotiations also started y…

Sterling remains subdued due to slow wage growth

Pound/Euro rates staged a slight recovery yesterday, rising to €1.14 due to higher than expected inflation figures. The gains have not lasted however and levels have already dropped into the €1.13's again. This is due to the fact that despite inflation rising, the Bank of England are unlikely to move interest rates for fear of slowing the economy further. Wage growth figures this morning also showed that wages are rising much slower than prices, which means consumers are being squeezed and that's not helped Sterling either.

Central Banks and Interest Rates
This evening the US Federal Reserve are widely predicted to raise interest rates to 0.25%. If they do it might strengthen the USD and pull GBP/USD rates lower. It's probably priced in to a certain extent already though due to the fact it's almost certain to happen.

Tomorrow, the Bank of England announce their decision, but if they move rates I will eat my hat! They have said rates will stay low for the foreseeable f…

Pound/Euro falls to €1.13

Image
Pound/Euro rates have fallen a further cent today, dropping from €1.14 into the €1.12's before settling back at around the €1.13 mark. (View live graphs by clicking here.) There have been no economic data releases of note, so the fall is simply down to the political and economic uncertainty due to last week's election resulting in a hung parliament.

The UK is supposed to start Brexit negotiations next week, and while the EU side have set out their stall and are ready to go, the UK side is a bit of a shambles. Without a clear majority, the Conservatives will form a minority government with support from the DUP. In practice, the government are now in a much weaker position both with the Brexit negotiations and in terms of how difficult it will be politically for Theresa May.  This uncertainty has led investors to sell the Pound and cause it to weaken.

Could the Pound fall further against the Euro?
I think that the rate could easily fall further. It may be that negotiations hav…

Pound falls on Hung Parliament

Image
As I'm sure my readers will know by now, yet again the polls were wrong and the election has resulted in a hung parliament. The Pound fell quite sharply as a result, dropping as low as €1.13 vs the Euro. However when markets opened at 8am this morning, we saw a recovery back to €1.14 so all in all, I'm surprised the reaction has not been more severe. In fact, the rate is around the same as it was on Monday, so not a complete disaster for clients that need to buy Euros. The chart below shows the GBP/EUR rate over the course of this week.


Why hasn't the Pound fallen further?
I think part of the reason that the Pound hasn't fallen further is that Theresa May has said she has no intention of resigning. They won many more seats than any other party (318) with only 1 more seat yet to be announced. Labour only won 261. 326 are needed for an overall majority, and with the DUP having 10, I think that the conservatives will try to form a coalition with them that would give them…

Election jitters continue to drive the Pound

Sterling has risen against both the Euro and US Dollar during European trading today, recovering early losses in Asian trading before UK markets opened. The Pound seems not to have been adversely affected by the horrendous attacks in London on Saturday, and continues to be driven by opinion polls ahead of this Thursday's election. You can read my recent post here on the various outcomes of the election and the effect it might have on exchange rates.

Some polls still suggest that Theresa May will win with a larger majority, and if this is the case I think the Pound will rise on Friday morning when markets open. There are other polls however that show the result will be a hung parliament. If this is the case it means that on Friday morning, there will be no stable government formed, and it's likely that the Pound will be sent crashing.

Whichever way the election goes, come Friday I expect the Pound to break out of its recent range where it has been sat at around €1.15 vs the Eu…

Pound/Euro falls, while Pound/Dollar rises

Image
The Pound continues to struggle against the Euro, and during trading today has fallen from €1.15 to the low €1.14's. (Click here for live interactive graphs). Part of the reason are election opinion polls, which continue to cast doubt on whether the Conservatives will win next week's election with an improved majority. I think that ultimately it is likely that they will, and if so, this time next week GBP/EUR rates will recover back to €1.17 to €1.19.

Another reason for the drop in Pound/Euro today is due to US jobs figures. A short while ago the latest US Non-Farm payrolls figures were released, and the actual number of new jobs was much lower than expected.

This caused the GBP/USD rate to rise to $1.29 as the USD weakened and became cheaper to buy. As investors sold the USD they bought the Euro, causing it to gain strength and become more expensive to buy. You can see this inverse relationship between GBP/EUR and GBP/USD in the charts below. You can see that the graphs look q…