Sterling makes gains, then plummets.

The pound made good gains yesterday, before plummeting this morning showing how volatile the currency markets are at present. First we’ll look at the gains, then the reason for this mornings correction.

Sterling Exchange Rates Gain
Sterling extended it’s rally yesterday, hitting its strongest since early December against the euro, which came under pressure ahead of the European Central Bank’s first one-year refinancing operation.

Gains against the euro helped sterling to a seven-month high against a basket of other currencies as investors feel that all the bad news about the UK economy is for the most part priced in.

The pound fell against the US Dollar though as renewed concerns about global growth boosted demand for the USD and curtailed demand for currencies perceived as higher risk. (As mentioned in yesterdays report, when the markets are jittery, speculators move funds from currencies like the pound to the US Dollar.)

There is uncertainty before the ECB’s first ever one-year refinancing operation today which is aimed at getting banks lending again. This put pressure on the Euro helping the rate climb. There was also an article in the wall street journal about Germanys budget defecit which also weakened the single currency (again as mentioned in yesterdays report, as germany is the biggest economy in the EU it has a big impact on the single currencies value.)

This provided an opportunity to take the euro lower against sterling, continuing a trend of weakness over recent weeks. This also reflects optimism that the UK economy may be over the worst of the downturn, just as concerns have emerged about the euro zone.

The pound therefore is percieved to have already been through the worst, and renewed concerns about the Eurozone make me beleive that in the medium term, exchange rates for GBP/EUR are likely to continue the upwards trend. However, spikes in the market are still happening, and as we will see in a moment, the pound is not invincible and we have seen a drop this morning.

Pound falls
Despite all the above, and that forecasts are pointing towards higher rates, we have seen the pound plummet this morning. At the time of writing, rates are as follows:

GBPEUR 1.1739
GBPUSD 1.6320
GBPNZD 2.5811
GBPAUD 2.0778
GBPCAD 1.8804
GBPZAR 13.425

So, why the fall if the forecasts are saying that rates will rise?
A few reasons. Firstly we had some data from Germany this morning which measures confidence – the figures were much better than expected which has strengthened the Euro. Also, the World bank’s announcement of further economic contraction for 2009 for the UK did not help. The World Bank has downgraded its global economic forecasts to a 2.9% contraction in world economy, from the previously estimated 1.7%, while warned about a decline on investment in developing countries, that could increase poverty.

So, as outlined above, investors quickly return to the USD, causing temporary weakness in the pound.

In a very quiet week for UK data, it’s likely to be events in the US and Eurozone that drive rates. Today we have Purchasing Managers Index for the EU. We also have home sales and house price data for the US. For the reasons already mentioned, movements in USD can effect the pound.

UK Jobs
Another reason the pound has fallen slightly, is the outlook for jobs in the UK, This is bleaker now than it was in the 1990s recession and more like the deep recession of the 1980s, the TUC says. The unemployment rate increased by 30% in the first 12 months of the current recession, compared with 22% in the 1990s and 29% in the 1980s. So, any hint of bad news like this quickly gives the market the jitters.

When to purchase your currency
This has to be your decision, as nobody can predict exactly what may happen in the market. While the medium term view is that pound rates will have climbed by year end, it’s important not to leave everything to chance. Even in an upwards trend we can see movements like this morning that make a big difference to the cost of your currency.

If you have a requirement to purchase currency with Sterling in the next few months, then get in touch with us today and discuss your options to protect you against market movements. Likewise if you are selling currency back to Sterling, then the upwards trend will be costing you money week by week. with FCG you can lock in todays rates for a date up to 2 years into the future. Then you will know exactly what you will get and not be gambling large amounts on unpredictable market movements.

When you get in touch, ensure you mention you heard about foremost currency group through our Blog. Simply quote ‘Blog’

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