So what’s been happening?
Over the last few weeks the Pound vs. Euro rate has been steadily dropping as investors become more confident about the Eurozone tackling its debt problems. During this time we have seen the exchange rate drop from a 4 year high of €1.2860 down to the lowest in 3 months when we touched €1.2350. This demonstrates not only how volatile the market is at present, but also the affect fluctuating exchange rates can have on any currency requirement. In just a few weeks the cost of a €200,000 property has fluctuated by nearly £7000.00.
So what is causing the volatility and what can we expect to see in the coming weeks?
It’s really all down to confidence in the Eurozone. When we hit the highs, there were significant concerns over the Eurozone’s debt issues which had weakened the Euro significantly. In the last few weeks however, we have seen Germany give the go ahead for the regions new rescue fund and the European Central Bank laying down bold plans to lower the borrowing costs for struggling countries. This is what has caused GBP/EUR rates to fall as confidence returned to the single currency.
In the last week however, poor euro zone business activity data fanned concerns about a deepening recession in the region, helping the Pound /Euro rate rise back to around the €1.25 level. The Euro has fallen in value as gloomy euro zone purchasing managers’ surveys suggested the European Central Bank’s plan to buy the bonds of indebted euro zone countries has yet to bolster business confidence.
So will rates now continue rising or is this just a short lived spike?
Any significant gains are probably unlikely, due to the impact of the fragile Eurozone economy on the UK, which has strong trade links with Europe. We have actually seen better UK data recently, including signs of falling unemployment and a strong rise in industrial production, which suggest the economy may have recovered in the third quarter. However, Bank of England minutes released last week showed that some policymakers felt the UK economy may need more stimulus, keeping alive speculation the central bank may extend its £375 billion QE programme in November.
Weak fiscal numbers (such as Friday’s data showing UK borrowing is more than 25% over target) will keep the pressure on the BoE to ease monetary policy further to support growth, and more QE may well weaken Sterling as it has in the past. Governor Mervyn King gave a downbeat assessment of the British and world economy last week, and warned the euro zone could yet fall apart.
So in a nutshell, GBP/EUR rates are being pulled in both directions; renewed concerns over the Eurozone are weakening the Euro, however concerns over more QE in the UK and how the EU debt crisis may affect our economy are holding Sterling back from making significant gains. Where rates will move in the coming weeks comes down which way this currency tug of war goes, which in turn depends on confidence in the Eurozone. Forecasts from the major players differ wildly from as high as €1.29 to as low as €1.18 by year end, illustrating how uncertain things really are.
In times like these, simply leaving things to chance is a very risky strategy, and you could end up with a rate much worse than necessary. You can take some control over the market by knowing what tools are available such as Stop Loss, Limit Orders and Forward contracts. Having a free consultation
with us will allow you to employ a strategy that is right for you, and having a framework in place means you can budget effectively and not be caught out by unexpected swings in the rate such as we have seen recently.
Weekly Economic Data that may affect exchange rates
Monday – In the UK today we will see the latest House Prices which reflect overall economic health. In the Eurozone there are Italian Trade Balance figures, German economic assessments and Import prices. There is nothing of note from the USA other than some minor manufacturing numbers.
Tuesday – There are no UK releases at all today. There is a meeting between ECB president Mario Draghi and German Chancellor Angela Merkel, which could throw up some surprises and affect the value of the Euro. Staying in Europe, we have Consumer Confidence measures from Germany and Italy. Elsewhere, the USA has some consumer confidence and house price measures, and New Zealand releases its latest Trade Balance figures.
Wednesday – A big day for Germany today, with the latest Inflation data and Retail Sales numbers being released. We will also see the UK CBI trade survey, although it doesn’t usually affect GBP very heavily. Across the pond we have the latest US Mortgage Applications and home sales numbers.
Thursday – It’s likely to be a choppy day for Sterling/Euro. Starting in the UK we have the latest GDP numbers in addition to confidence and Business investment measures. In the Eurozone we see Consumer Confidence, Industrial Confidence, Money Supply and Germany unemployment. In the United States there are measures of Jobless Claims, Home Sales and Durable Goods orders.
Friday – There are no significant UK releases today. In Europe we have French GDP and Consumer Spending, Italian & Greek Inflation Data. In the United States there are various measures of personal Spending and inflation.
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