13th June 2011
Good morning. As usual for a Monday, we’re going to take a detailed look at Sterling vs Euro exchange rates, the movements over the last week, and where GBP/EUR rates may head for the remainder of 2011. This outlook forecast can help you make the decision on when to buy your Euros and help you achieve the best exchange rates for Euros.
Sterling vs. Euro;
Last week was a volatile one for the Sterling/Euro cross, hitting a 1 month low before making a muted recovery later in the week. In just the last 10 days alone rates have fluctuated from highs of €1.1550 to lows in the €1.11’s. This represents a difference of more than £6000 on a €200,000 currency purchase, clearly illustrating just how volatile the currency markets can be:
Last week started with a warning from the International Monetary Fund (IMF) on UK growth. The IMF’s annual economic assessment said the UK economic recovery was broadly on track but more quantitative easing may be required if growth continues to be weak. This was the first blow to the Pound and the catalyst for a downward trend in the GBP/EUR rate.
Following the IMF’s warning on growth, a media report had quoted a Moody’s analyst saying the UK was at risk of losing its AAA credit rating. This caused Sterling to fall significantly against other currencies as the markets took note of the warning. It was not an official announcement however, and as markets realised this the losses were short lived, however Moody’s did then state that despite the fact the outlook for UK growth remains stable for now, any weaker growth in the economy could lead to a reassessment.
Following this double whammy of criticism of the UK economy, we had the interest rate decisions for both the UK and EU. As expected, the UK left the interest rate on hold at a record low of 0.5% for 27th consecutive month, with most analysts not expecting any change until well into 2012. Interest rates affect exchange rates because higher rates represent a higher return for investors, and as such attract investment in a currency causing it strength. So as a general rule of thumb, when interest rates are low a currency remains weak, and when interest rates are expected to rise, it can cause strength.
The European Central Bank (ECB) also left interest rates on hold as expected, however in a press conference afterwards the ECB president Jean Claude Trichet used the phrase ‘Strong Vigilance’ which historically is his way of saying “interest rates are likely to go up in the next meeting”.
So, markets now expect an EU rate hike in July, with at least one more hike on the cards later in the year. Further rate hikes in the EU after July however may not come as soon as some analysts had been expecting, and this paring back of future rate hike expectations caused the muted recovery in GBP/EUR rates.
Will GBP/EUR go up or down in 2011?
In summary, there is not much to suggest Sterling will strengthen against the single currency. Indeed with future interest rate hike on the cards in the EU, most market participants expect the Euro to continue to gather strength against Sterling in the coming months, potentially pushing GBP/EUR rates lower. So, if you need to buy Euros through the remainder of the year, contact us today to discuss the options we have available to protect you against adverse movements.
Likewise if you need to sell Euros back to Sterling, it’s impossible to gauge how much the expected EU rate hikes are already priced into the market, so you may wish to consider taking advantage of rates that are currently very close to the best in 12 months.
If you need to buy or sell any currency, click here to send me an enquiry. You can then take advantage of a free consultation on the currency markets, and take the first step to taking advantage of the commercial exchange rates we offer. They can be up to 5% better than you can get at the bank, so fill the form in now.
Weekly Economic Data that may affect exchange rates
Below I have listed the main data released for the week ahead.
The only UK data of note is the RICS house price data released at midnight tonight. This presents the housing costs in the UK housing market and is considered a measure of the economy as a whole. There is little data of note from the EU as markets are closed for Whit Monday. Australian markets are also closed for the Queen’s birthday.
From the UK today we have Nationwide Consumer confidence, which is a barometer of how consumers feel the economy is performing. There are also UK releases for House Prices in addition to various inflationary measures in the shape of the Consumer Price Index. From the US we have Retail Sales and inflation data. There is no data of note from the Eurozone.
The EU today starts the ECOFIN meeting, where Finance ministers of the 27 member states discuss the economy. Given the turmoil in the markets at the moment any decisions could affect exchange rates. There are also industrial production figures from the EU today. From the UK we have unemployment data. Stateside we will see Industrial production and various inflationary measures.
Today we have Retail Sales from the UK, and Jobless data from the USA. There is also an interest rate decision from Switzerland.
A very quiet day with only Trade Balance figures from the EU. Other than that there is a minor consumer sentiment measure from the USA.
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