Thursday 9th August 2012
Good morning everybody. So, an interesting week so far since my last post on Monday morning. After steady declines for the Pound/Euro rate, yesterday saw a slight recovery, and it was all to do with the Bank of England (BoE). Today I’ll focus on what was said in the BoE’s inflation report, and what the forecast is for where Pound/Euro rates may go in the coming weeks and months.
BoE Inflation report gives the Pound a boost
Sterling rose nicely yesterday against the Euro and US Dollar, after the Bank of England governor Mervyn King said cutting interest rates would damage financial institutions and would be partly counterproductive. The Pound had weakened over the last week on expectations that there would be a cut in interest rates. As this now looks less likely in the short term, it has strengthened the Pound and pushed exchange rates up, at least for now. The reason is a higher interest rate is attractive to investors, causing demand for a currency and therefore strength.
He didn’t actually rule out a rate cut, but did say that another quarter point cut was “neither here nor there”. He went on to say that “Another quarter point on bank rate is not going to be the difference between having a recovery and not having a recovery.” He added that a rate cut would damage some financial institutions and therefore would be “more counter-productive than beneficial”.
In response to the comments, Vicky Redwood, chief UK economist of Capital Economics said that “The door is clearly open to more stimulus and we still expect both more quantitative easing and a further interest rate cut in November”.
So, his pouring cold water on to the chance of a rate cut in the short term has given the Pound a boost, but it’s still likely more stimulus, and a cut, will come sooner or later. It’s likely that they are simply waiting to see what affect the EU crisis will have on the UK before using the last tools it has in its box to tackle the stagnating economy.
The future of the Pound/Euro rate in the coming months can be viewing in the same way; it all depends how badly the problems in the UK will affect the UK, such as exports.
Also in the quarterly inflation report, they cut their growth forecast to close to zero from about 0.8%. Most publications, the BBC in particular, pounced on this fact and had this as their main headline, saying that is shows that the government spending cuts were not working.
The markets clearly do not agree, as demonstrated with the Pound rising a point against the Euro following the press conference. Both the IMF and the currency markets in general reacting positively to the deficit reduction programme and this is keeping the Pound relatively well supported against other major currencies – for the moment at least.
So what else did he say that was of note?
“We are navigating rough waters and storm clouds continue to roll in from the euro area,”
“Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness.”
What I take from this is that the BoE are very cautious on what effect the EU crisis will have on the UK, and I think that is what will drive the Pound/Euro rate in the coming weeks. Later in the year, more QE and a rate cut is likely, so don’t expect rates to shoot back above €1.30 any time soon.
So which way are Pound/Euro rates going?
What I can do is give you my opinions based on the background information that is in the public domain, and explain what has been moving rates. In this way you can make an informed decision on what is right for you, depending on your particular requirements and attitude to risk.
More problems in the Eurozone could cause further gains in the GBP/EUR rate, but I think in the short to medium term, concerns about UK growth are going to keep the Pound in check. The tug of war between the weakening Euro, and the weakening Pound will continue and this is what will drive rates.
If you need to purchase Euros in the coming months, then if it were me I would consider fixing a rate while there is a spike in your favour. It has been in decline for a few weeks after the recent highs. There is no way to predict where exchange rates will go, however with rates within a few points of their best in 4 years, holding out for even more could prove very costly.
That’s what I would do, however I am very risk averse and do not like gambling. Everybody is different however, and should you want to gamble on rates going higher, then talk to me about ‘Stop Loss’ orders. These allow you to continue aiming for a higher rate, but not leave yourself open to unnecessary losses. Click here to make a free enquiry and find out more about the contracts and rates we offer our clients.
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