What will happen to Pound Euro exchange rates, May June 2010?

Good Morning. So, what’s happening with exchange rates?
Well Sterling is getting weaker, as is the Euro. The dollar is getting stronger. We’ll have a detailed look at each currency in turn in a moment, and look at the impact it will have on Sterling exchange rates, particularly for pound to Euro. First, the usual snapshot of rates as at 08:30am:

  • GBP/EUR 1.1680
  • GBP/USD 1.4491
  • GBP/AUD 1.6500
  • GBP/NZD 2.0639
  • GBP/CAD 1.4865
  • GBP/JPY 134.47
  • GBP/ZAR 10.848
  • GBP/CHF 1.6390
  • EUR/USD 1.2404

Sterling Weakness
Following the election, the pound was initially buoyed and rates hit a 1 year high against the Euro. Since then, the problems that have not gone away have started to resurface. Very high debt levels, with big spending cuts and tax rises expected to curb the deficit. The UK was the last major economy to exit recession, and the government at the time tried to combat the recession by borrowing huge sums through Quantitative Easing.

This has left the UK with a huge deficit, and the Bank of England last week warned the growth forecast had been cut. Data showing a slowdown in UK house price growth also raised concerns about the health of the domestic economy.

The required fiscal consolidation will put considerable strains on the real economic development in the near future. The recovery from the recession will be slow, and so Sterling competes with the euro for the position of the weakest currency.

The net result is rates for the US Dollar have dropped from $1.55 to $1.45 in less than a week since the election. The pound has dropped massively against most other currencies too, and it’s important to remember that the only reason Pound to Euro rates haven’t nosedived is weakness in the Euro that’s keeping rates buoyed.

Weak Euro
The Euro is very weak at the moment due to all the debt problems in some EU countries, and the bailout for Greece is also worrying investors. The Euro hit a 4 year low against the US Dollar yesterday.

Traders fear that the austerity measures being put in place in many eurozone countries will hit growth.Despite the huge sums of money pledged in support for eurozone countries, severe measures are needed to cut budget deficits and debt. Earlier this month, the European Union and International Monetary Fund agreed a package worth 750bn euros to try to prevent the Greek crisis from spreading to other weak eurozone economies.

That was initially wholeheartedly welcomed by the markets, with rises for both share markets and the euro. But despite the initial euphoria that greeted that announcement, fears have returned and the euro has begun falling again.

The net result is that despite Sterling weakness, rates to buy Euros are still very favourable, although this is only the case because of the bailout problems. Once sorted, expect the Euro to regain strength.

US Dollar Strength
While debt problems and fiscal recovery worries are keeping the pound weak, problems with debt in EU countries are keeping the Euro weak. So, the US Dollar remains the safe haven currency. Investors worried about the UK and EU economies are moving funds to the USD. This is causing strength in the currency. The combined USD Strength and EUR weakness can be clearly seen in the EUR to USD exchange rate – it hit a 4 year low yesterday, and today it’s at 1.2396.

So what does this mean for you?
If you need to buy Euros, you may be thinking that rates will head back towards €1.20. Remember, the only thing keeping rates where they are is Euro weakness. As soon as the Greek debt crisis and bailout is properly agreed, then the Euro may well stabilise. This would cause the currency to strengthen, and it’s quite possible that GBP/EUR rates could tumble much like most other Sterling exchange rates have.

If you need to buy Euros within the next 6 month, then you should be fully aware of all the above issues as it you could see the cost of buying Euros sky rocket in the coming weeks. You can fix today’s rates by using a Forward contract. You only pay a small deposit to do so, and you can then lock rates in close to a 1 year high. Contact us today to discuss this further. Click the links below, and ensure you mention ‘BLOG’ when you contact us.

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