Pound/Euro exchange rate forecast/outlook

Monday 23rd July 2012
Good morning. It appears the jet stream has shifted to bring some warm weather to the UK at long last, however one thing that has not shifted is the resilience of the UK pound against the Euro, which surged to new 4 year highs last week, touching €1.2870 at one point. In today’s report I will give a detailed overview of the Sterling/Euro exchange rate forecast, and analyse whether rates will get higher or not.

Sterling vs. Euro;

Below is a graph spanning the last four years showing the journey that sterling has gone on to reach the point we are at today.

In the past nine months, sterling has strengthened by 12% against the Euro and the culmination of this movement was felt last Friday when the mid-market price hit €1.2858. This meant that we were back at levels not seen since the middle of 2008, which was just before the pound’s decline to near parity with the Euro.

So what has caused the rise in rates?

There has been a constant threat of collapse in the Euro zone for a while now and endless problems with Greece, Italy, Portugal, Ireland and Spain have contributed to the fact that investors refuse to back the beleaguered single currency.

Spain was caught up in the latest drama last Friday with news that finance ministers in the Euro zone will soon need to approve a deal to lend up to 100bn Euros to Spain so that it can re-capitalise its banks. Investors continue to worry about Spain’s financial health which is pushing its borrowing costs higher. There are also fresh signs in Spain of public opposition against the demands being imposed on the country by Euro zone leaders, with more than a week of violent demonstrations and the very real threat of contagion spreading throughout the country and potentially spilling over into neighbouring nations.

So the UK economy is faring well then?

The problems in the Euro zone are well documented, but it is not like the British pound is without its issues. For example the UK government borrowed more than expected in June, leading some analysts to question whether it will meet its deficit reduction target this year. Last Thursday, the International Monetary Fund (IMF) said the government should slow the pace of budget cuts next year if growth does not recover and earlier last week Prime Minister David Cameron admitted that austerity measures may have to last until 2020.

The IMF and Bank of England continue to warn that interest rate cuts may be necessary in the UK, so while rates may keep going up due to the UK debt crisis, it’s by no means a given.

So with this in mind it is a surprise to see Sterling sitting at such a high against the Euro. It is argued that this cannot last forever and there are murmurs from market analysts that there will soon be a shift in rates. The pound may continue to make further gains against the Euro but it is hard to believe that the Bank of England will let things continue like they are because it makes UK exports so expensive and ultimately an unattractive option.

The chart below shows the cost of a €200,000 property abroad over the last 4 years, and you can see that it has become much more affordable. To ensure you don’t lose out on the current rates, get in touch with us today.

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Weekly Economic Data that may affect exchange rates

Monday – The only UK data of note today is the Nationwide Housing Prices. Elsewhere we have some inflation data from Australia, and some Consumer Confidence from the United States.

Tuesday – It’s quiet again for the UK today with UK Mortgage Approvals the only data of note. It’s busy in Europe however with various data including Manufacturing, Services, Inflation data, and a Spanish bond Auction.

Wednesday – Nothing of note from Europe or the UK today. Stateside we have housing prices and manufacturing data. New Zealand releases its trade balance data showing imports and exports.

Thursday – We finally get going with some UK data today with the latest GDP figures being released at 9.30. The Eurozone has some consumer confidence figures, along with German assessment of the current business climate. Over in the USA we see home sales and mortgage approvals. Lastly, New Zealand has an interest rate decision at 10pm UK time.

Friday – The EcoFin meeting is in Europe today, which could give further clues on the direction of the debt crisis. Also in Europe are some confidence numbers from Germany. At lunchtime we see jobless claims and home sales from the United States.

Getting the best exchange rates

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