Pound could fall by up to 15% this year

Monday 10th June 2013 
Good afternoon. It’s been relatively stable in the world of exchange rates over the last week or two. Both the Bank of England and European Central bank have kept interest rates on hold again, as expected. We now look towards the new Governor taking over in a few weeks, and I’ll go in to detail below on how this could potentially weaken the Pound considerably. 

We also saw a surge in the GBP/USD exchange rate last week, rising more than 2 cents in just a few hours. So what do we have in store in today’s report? 
New Bank of England governor could weaken Sterling 

The Bank of England has kept its stimulus programme of quantitative easing (QE) unchanged and also held interest rates at 0.5% at its recent meeting last week, as expected. However there could be a change in policy when the new Bank governor, Mark Carney, arrives in July. The BoE has been split in recent months over whether to increase QE from its current level of £375bn. 

Recent economic data has painted a mixed picture of the UK economy. Official figures showed retail sales fell in April, while unemployment rose in the three months to March. Last month the Bank upgraded its own forecast for growth, and recent data confirmed that the UK has avoided a triple-dip recession, growing by 0.3% in the first quarter of the year.

Due to the mixed data, 3 of the 9 MPC members have voted for more QE at recent meetings. There is now speculation the new Governor Mr Carney will pursue more QE which could weaken the Pound significantly.

Pound could fall by up to 15%

Mr. Carney, the current Bank of Canada governor who takes over from Sir Mervyn King in July, said central bankers should consider “changing the policy framework” to stimulate a desperately weak economy. 

His words were directed at the Bank of Canada but will be seen as a hint that he will push for radical QE action in the UK, where the economy has been stagnant for two years. Some reports have suggested Mr. Carney will try to devalue the pound by as much as 15% in a last ditch attempt to cement the UK recovery. This of course would mean the cost of buying overseas could increase. 

It seems likely that Mr Carney is going to try and use Quantitative Easing to weaken the Pound. This is because while a high exchange rate is attractive for overseas property buyers, it’s not helpful for returning the UK’s economy to growth. It makes our exports more expensive, and 50% of UK exports go to the Eurozone. A weaker Pound would make exports more attractive and aid economic growth. 

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Pound/Dollar rates surge by 2 cents 

Last week we saw a surge in the GBP/USD rate, pushing up over 2 cents in just a few hours. This was a little unexpected, and has been put down to increased risk appetite. Generally when there is global economic uncertainty as we have seen recently, investors buy US Dollars as it is seen as a safe haven currency. Comments from Europe last week seem to have calmed the markets a little, and the more positive outlook for the EU has meant investors are more confident. As a result, all these investors that had bought US Dollars sold them off, and it was this that caused the weakening of the USD. 

Moving forwards, as outlined above the threat of more QE means there is a real chance we could see rates fall back to below $1.50. It all depends on how UK economic data fares in the coming weeks, which I’ll go over later in today’s post. 

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Economic data releases this week that might affect exchange rates 

We have quite a few important releases this week that could cause exchange rate volatility. 

Today we had some minor EU inflation data and investor confidence measures. The numbers were little worse than forecast, and this caused the Euro to weaken off and push GBP/EUR rates close to €1.18. 

Tuesday - we have Industrial and Manufacturing production figures from the UK at 09:30am. These are a good indicator of UK economic activity, and so can affect Sterling. Also on Tuesday we have the NIESR UK GDP estimate. This is very important as the report is highly reliable, and could affect whether the new BoE governor will pursue more QE when he takes over. 

Wednesday - UK data is unemployment data. In the Eurozone we have Industrial production measures and inflation data, which could affect future interest rate movements in the EU. Also on Wednesday we have the latest decision on Interest Rates from New Zealand, so this might affect GBP/NZD rates. 

Thursday - Nothing of note from the UK on Thursday, but we do have a monthly report from the ECB so we could see movements in the GBP/EUR rate. Most data today though is from the United States – Jobless Claims, Retail Sales, Trade Balance figures. If these numbers are better than expected, then GBP/USD could drop away. 

Friday - sees a host of inflation and employment data from the EU, so expect a choppy day for the value of the Euro. We also have inflation data from the USA. 

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