Thursday 28th July 2011
Good morning. Further poor data on Wednesday hurt the Pound, however exchange rates remained high due to Sterling being supported by the problems regarding the US debt ceiling. Today we’ll look at the implications of this, and where rates may go moving forwards.
Sterling supported due to problems in US
Sterling dipped slightly on yesterday after disappointing UK factory data, but remained within sight of a 6 week high versus a weak USD and looked set to retain support in the absence of a deal to raise the U.S. debt ceiling. Against the Euro the Pound also rose, as investors bought it as an alternative to the USD, and this supported the Pound.
So what do the analysts say?
“Everyone is looking at the bigger picture of what is going on with the U.S. with the debt ceiling, so sensitivity to data has been somewhat diminished,” said Charles Diebel, head of market strategy at Lloyds. This basically supports what happened yesterday, with the Pound rising despite poor UK economic data.
“This data is a little disappointing but to a degree most of the expectations for UK data have been skewed to the downside. When you get a weak number like today it’s more an affirmation of people’s thinking than a shock.”
This following Tuesdays poor growth figures showing that UK economic recovery is sluggish.
What about Sterling to Euro rates for the coming weeks?
Despite the euro zone debt crisis and threat of a Greek debt default the single currency has remained strong against the pound as a result of favourable rate differentials.
The Bank of England is expected to keep interest rates on hold at a record low 0.5 percent until late next year because of concerns over the fragility of the UK economic recovery while the European Central Bank has already embarked on a tightening cycle.
It’s hard to know which way things will go. If UK data continues to be poor and the EU continue raising interest rates, then it is likely GBP/EUR will fall. If however there are further debt problems in the EU, or economic data in the UK starts improving, rates could go up further.
So what are the options to protect against rates moving the wrong way?
If you need to buy or sell currency, then at the moment rates are volatile and there’s no way to now which way rates will move. In uncertain times like this, simply hoping rates will move in your favour is not a reliable method, and you could end up with a significantly worse rate than necessary.
You can use Stop Loss and Limit Orders to your advantage. A stop loss is an order for us to buy your currency should the rate fall below a pre-agreed level. In this way you have a safety net and a worst case scenario. At the same time, a Limit order can be placed to buy should rates spike to a level not currently achievable. In this way you can aim for a higher rate, without leaving yourself open to a significant cost increase.
These orders are useful if you are buying or selling property abroad, and need the best exchange rates. They can also be useful if you are a business and need to pay or receive payments in a foreign currency.
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