Effect of Quantitative Easing on Exchange Rates

Thursday 6th October 2011
Good morning. Sterling exchange rates rose a little yesterday morning after a UK services sector survey data was better than expected. Gains were short lived however, as the Pound remains under pressure on growing expectations the Bank of England will soon announce further quantitative easing to boost the economy, this could happen today. At 08:30am this morning rates are as follows:

• GBP/EUR 1.1578
• GBP/USD 1.5429
• GBP/AUD 1.5937
• GBP/NZD 2.0102
• GBP/CHF 1.4298
• GBP/CAD 1.6065
• GBP/ZAR 12.243
• GBP/JPY 118.30
• GBP/DKK 8.6177
• GBP/NOK 9.0613
• EUR/USD 1.3319

Could the Bank of England announce Quantitative Easing today?

Data yesterday showed UK economic growth is almost non existent. The revised GDP figures showed the economy is pretty much at a standstill, and has been now for 6 months. This increases the case for further Quantitative Easing, which many analysts believe will happen if not today, then in November.

Pumping money into the economy would help keep interest rates low and boost the economy, however it would also flood the market with Sterling and this could push exchange rates lower. Most analysts believe they will have to pursue more QE, and this could be announced today. There are some that believe that the BoE may wait until November, by which time there will have been another round of economic data to help them in their decision.

The fact remains however that it really is a question of when, not if, they announce further QE. It is this that has been keeping Sterling on the back foot, and the reason many in the markets believe Sterling is at risk of a correction to the downside.

EU debt crisis; what next?

The debt crisis is now turning into a banking crisis, with so many UK and EU banks exposed to Greek debt, this has been causing problems in the global economy. Italy has had it’s credit rating downgraded, the IMF say they may step in to assist, leaders have delayed a decision to give more money to Greece – all in all there is a considerable lack of direction in the Eurozone.

These problems have weakened the Euro, and this is the reason GBP/EUR rates are not down in the €1.10 or below territory. Today the ECB will announce their decision on interest rates, but it’s likely there will be no change.

What is important, is the press conference after the decision. This is where the president of the ECB gives his thoughts on the economy. Last month his comments caused significant changes in GBP/EUR so we will be watching closely today to see what impact his comments may have.

What you should do if you need to buy or sell currency

With markets extremely volatile for all the reasons above, exchange rates are very susceptible to any changes in economic figures. With so much happening at the moment, exchange rates could move either way by a significant amount. Rather than just hope rates move your way, there are various strategies you can employ to ensure you don’t lose out.

Stop Loss and Limit orders allow you to place upper and lower limits in the market, so should exchange rates move up or down, your currency is bought at a pre-agreed level. In this way you can still take advantage of any gains in the rate, but not lose out should rates fall away.

You could also look at Forward contracts, where you can fix the current rate for up to 2 years, and only lodge 10% of the total now, allowing you to budget effectively for any purchase.

To discuss these types of contract, fill in the enquiry form now and send us a free enquiry. We can then discuss your particular requirements and put a strategy in place so you can take control over your currency requirement. Take control of your currency exchange, and don’t let the markets control you!

Remember, our exchange rates are up to 5% better than you can get at the bank, so for any international transfers you need to do, make the most of your currency by contacting us now.

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