How Interest Rate decisions may affect exchange rates

5th August 2010

Good morning. Today is important for the currency markets, as we have lots of data including interest rate decisions that may well cause significant volatility. Today we’ll have a detailed look at what’s expected, and the forecast for the effect on exchange rates. First, the usual snapshot of rates as at 08:30am:
  • GBP/EUR 1.2056
  • GBP/USD 1.5835
  • GBP/AUD 1.7306
  • GBP/NZD 2.1785
  • GBP/CAD 1.6058
  • GBP/CHF 1.6649
  • GBP/ZAR 11.508
  • GBP/JPY 136.48
  • GBP/NOK 9.5194
  • EUR/USD 1.3130
Interest Rate Decisions

Today we will see both the Bank of England and European Central bank announce their latest decision on interest rates. Markets expect both to leave rates on hold, however they face a dilemma in their policy decision.

Interest rates are used to control inflation, which in the UK is currently well above the 2% target. Usually this would be a slam dunk for an interest rate hike, which would boost the pound. However, concerns about the pace of recovery means rates will likely be left on hold so as not to stifle the fragile economic recovery.

Some members have recently been voting for a rate hike to calm inflation, but the majority are currently happy to leave rates very low.

How will the decisions affect exchange rates?

Usually a rate hike increases the value of the relative currency, so depending on the comments we see after the decisions, there could be volatility. While we expect no movement in the actual rate, comments that indicate future rate movements will likely have an immediate effect on exchange rates.

Generally if it’s felt rates will go up then it increases the return for investors. This then drives investment towards an economy strengthening the currency. If it’s thought rates will remain low for some time, then it will likely weaken the currency concerned.

With uncertainty over both UK and EU rates, the GBP/EUR rate could move either way by as much as 7 points over the coming 3 months.

For the UK, we’ll have to wait 2 weeks for the minutes of today’s 12:00pm decision. The ECB however gives a speech after their 12:45pm decision, and this often causes swings in the value of the Euro.

So is Sterling going to continue to rise?

It’s a fine balance at the moment. Recent good figures, banking profits and growth numbers suggest the UK is growing faster than the UK and EU. However, looming austerity combined with expected cuts mean some analysts expect the pound to fall away in the coming months.

It’s impossible to predict future exchange rates movements; indeed the financial experts from many finance houses are currently split on which way the economy and thus Sterling will move in the coming months.

When should I fix my exchange rate?

Don’t just hope rates will move in your favour! Sterling has varied significantly in value over recent months, and given the uncertainty over growth and inflation in the UK, it could continue to swing either way for the remainder of 2010.

Regardless of whether you need to buy or sell a foreign currency, these exchange rate movements could dramatically alter the cost of your currency purchase.

In a volatile market the key tools to ensure you don’t lose out are currency options. A Stop loss order allows you to instruct us to buy your currency should the rate fall below a pre-agreed level. This way you can still hope for a higher rate, but have a safety net should things not move your way.

A limit order is an instruction to buy at a higher pre-agreed level, allowing you to take advantage of short term spikes in the market.

Whichever currency you need to buy or sell, contact us today for a free consultation. We can then let you know all the options available to you along with an analysis of what’s happening with the exchange rate for the currency you need to buy. Remember, our rates are up to 6% better than you can achieve at the bank, and so on large currency purchases the savings can be considerable.

If you are looking for the best exchange rates, click the link below to send us an enquiry, and have a free consultation on what’s happening in the currency markets.

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