Pound/Euro remains strong despite rate cut possibility

Thursday 19th July 2012
Good morning. Sterling/Euro rates remain supported well above the €1.27 level. This was despite some poor data from the UK; the number of people claiming unemployment rose more than forecast, and yesterday’s Bank of England minutes were pretty bearish, hinting at interest rate cuts to come for the UK. The pound shrugged this off and rates quickly recovered back against the Euro and other currencies. Today I’ll give an outline of recent data, and what it may mean for the future of Pound/Euro exchange rates.

Bank of England Minutes

Yesterday we saw the latest minutes from the Bank of England where they decided to pump another £50 billion into the economy. It was prompted by fears that the UK economy will see little growth this year. As I already reported though, the extra stimulus didn’t really have much of an effect on the Pound as it was so widely forecast and therefore already priced into the rates.

The MPC minutes also said that the “near-term outlook for GDP growth has weakened”. The UK economy is currently in recession, having contracted by 0.3% in first three months of this year and by 0.4% in the final quarter of 2011. The first estimate of how the economy fared during the April-to-June quarter will be released next week. The markets initially dipped quite a bit when the minutes were released, but the bad news was quickly shrugged off by the markets, with the Pound recovering its losses and then some against the Euro, hitting new peaks of €1.2770 before settling back down in the mid €1.27’s.

What was interesting was to see the vote and the discussions held. The MPC voted 7-2 in favour of increasing its quantitative easing (QE) programme by £50bn, but of more interest was the fact that they also discussed the possibility of interest rate cuts…..

Interest Rate cut for the UK soon?

The Bank of England may cut interest rates to below its current record low of 0.5% in the coming months to try to revive Britain’s depressed economy. IMF boss Christine Lagarde has already urged the Bank to lower its base rate and use more quantitative easing to help the UK weather the Eurozone debt crisis.

The BoE said that ‘Information during the month suggested export prospects had weakened, which would further impede the UK economy’s rebalancing away from domestic demand towards net exports. The fact they have considered the case for a cut in the last 2 months should be a warning for those betting on rates rising further.

If we do see an interest rate cut, it means less return for investors and will drive investment elsewhere for a better return. This would have the effect of weakening the Pound and pulling rates down. The noises coming from the BoE don’t surprise me; they actively want a lower exchange rate to help our exports, so I do think a cut is on the cards in the coming months – they even alluded to this in their statement saying that “would further impede the UK economy’s rebalancing away from domestic demand towards net exports” … translation: we want a lower exchange rate and will cut interest rates to help make this happen.

So will Pound/Euro rates go up or down?

For now, most analysts expect sterling will continue to rise against the euro because the EU’s deepening debt problems is encouraging investors to search for perceived safer alternatives. All the recent movements have been due to what happens to the euro, and the crisis is having a disproportionate effect.

That’s the short term view. As outlined above, don’t be surprised to see the Pound being dragged back down to help our exports, so these 4 year highs may be short lived. However forecasts among the big players still differ from as high as €1.33 to as low as €1.20 showing that nobody knows which direction things will take. It’s more important than every to know your options if you don’t want to end up with a worse rate than necessary.

So do I buy/sell my Euros now or wait?

In the current climate, one of 2 options should be considered. Whether buying or selling Euros, the safest option is to fix your rate now to protect against further uncertainty. Nobody knows for sure which way rates will go, and by fixing now, you remove all the uncertainty and exposure to the market and are protected against the market going the wrong way. Of course, if rates get better you cannot take advantage as your rate is already fixed.

If you want to take the risk of rates getting better, then don’t leave yourself exposed. A sensible strategy if you want to go down this road is to place a Stop Loss order, where we can buy your currency should it drop below a pre agreed level. In this way you can still benefit if rates continue to go your way, but if they don’t you can budget on your ‘worst case scenario’.

To discuss your requirement and how we can help you get excellent exchange rates, contact me now for free.

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