Thursday 21st June 2012
Good morning. Exchange rates have continued to be quite volatile, with news from the EU and Bank of England key to the future movements of the Pound Sterling to Euro exchange rate forecast. In today’s post, I will look at the following:
- More UK Quantitative Easing (QE) on the cards
- Greece makes deal to form government
- Spain and Italy to seek bailouts
- What all this means for exchange rates
More QE on the way from the Bank of England
Yesterday the Bank of England (BoE) released the minutes to their latest decision to hold off further Quantitative Easing (QE).
They showed that the BoE’s Monetary Policy Committee voted 5-4 against restarting the gilt purchases they suspended in June, with Mervyn King , Adam Posen and David Miles all voting for a £50 bn injection. What exatly is QE? There is an excellent article explaining it here on the BBC.
So it seems it was a very narrow call indeed earlier this month not to pursue more QE. The closeness of the vote suggest to me that there will be another round of stimulus at the beginning of July, for between £25 and £50 billion of extra money.
As soon as the minutes were released, the Pound fell sharply against the Euro as the graph shows. If more QE is indeed announced in a few weeks, then expect the Pound to drop further against the Euro and other currencies.
BoE Governor Mervyn King said in a speech last week that the economic outlook had darkened under a “black cloud” of worries about the euro zone debt crisis, and that the case for further QE had increased.
QE would weaken the Pound as it floods the market with Sterling, and when there is an excess of anything it usually loses value. I certaintly think this will happen.
Greece makes a deal to form government
It emerged yesterday that a deal has been struck to form a new Greek coalition government. Antonis Samaras of New Democracy, the party which narrowly won Sunday’s elections, has met President Karolos Papoulias to confirm the deal. This puts to rest some uncertainty over the future of Greece within the single currency, however it is yet to be seen whether they will try to renegotiate their terms of the bailout.
Greece has endured nearly seven weeks of political uncertainty which threatened to spark turmoil throughout the eurozone and beyond. The country is in its fifth year of recession, and there is growing antipathy to the tough terms of Greece’s huge bailout from the EU and the International Monetary Fund (IMF).
For the time being, it gives some calm back to the markets and for the moment secures Greece’s place within the Eurozone. I do expect the parties involved to try to get a better deal, however the only thing I think that Germany will negotiate on is the timescales, not the overall terms.
This should give some strength back to the Euro, after weeks of uncertainty had weakened the single currency and pushed GBP/EUR exchange rates up.
Spain and Italy to seek bailouts
In other Eurozone news, there are plans to announce a £600 billion deal to bail out Spain and Italy. It is hoped that the move will send a strong signal to financial markets that Europe’s biggest economy is finally prepared to back its weaker neighbours. What the markets will make of it we will have to wait and see, but if the move is seen as positive, it could give the Euro strength and pull GBP/EUR rates back down. If it is interpreted as just kicking the can down the road a little further, we might see the Euro get weaker.
At a press conference to mark the end of the G20 summit, David Cameron welcomed the assurances given by eurozone leaders. He said: “What I’ve sensed at this summit is that there is a fresh impetus – using all the mechanisms, institutions, firepower they have.” He added that European leaders would put the future of the euro “beyond doubt”. White House sources indicated that a “new framework” to shore up the single currency would be unveiled at next week’s summit in Brussels.
So what does all this mean for exchange rates?
It removes some of the uncertainty that we have seen in recent weeks. With a clearer framework in place it could be that Pound/Euro rates now start to drop back away. Many ill informed articles in the press are still suggesting rates may hit €1.30, which was indeed forecast several weeks ago. However this was purely based on the Euro continuing to weaken, which may now not be the case.
Even if the latest ‘solution’ to Europe’s woes does not come to fruition, a weakening Euro would not necessarily push GBP/EUR rates higher anyway. Escalating problems in the single currency would affect our exports and weaken Sterling along with it.
Couple this with the very high chance o further monetary stimulus in the UK as explained at the top of this article, and we could well see Pound/Euro rates fall. Indeed we have not tested the highs of €1.25+ seen several weeks ago, and in fact we have seen rates slip into the €1.22’s.
If you need to buy Euros
With more chance of rates now falling, you may wish to secure your rate now to protect against falling in the wake of possible QE. Even if you don’t need your currency for some time, you can fix today’s rates for up to 2 years with a Forward contract, and only lodge a small percentage of the total to be converted.
If you need to sell Euros
The EU crisis is having unprecedented effects on the rate, with the Euro getting weaker. You could take the safe approach and fix rates now to protect against the uncertainty. If you hope rates will move in your favour, then don’t leave yourself totally exposed; speak to us about Stop Loss and Limit orders.
Don’t just hope for the best rates; make it happen
With much volatility and conflicting opinions on where markets are headed, it’s more important than ever to know your options, and take advantage of the expert knowledge I can offer you for no cost. I have worked in the FX markets for nearly 10 years and so have a very good knowledge of not only what moves exchange rates, but strategies and tools you can use to help you achieve the best possible exchange rate.
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