Wednesday 16th January 2012
Good afternoon. I thought I’d post up a mid-week update on what’s been happening with exchange rates, and Sterling in particular. In a nutshell the Pound is still struggling to make any headway, remaining between 1.20 and 1.21 against the Euro, and just below $1.60 against the US Dollar. In today’s post I’m going to have a look at recent UK economic data, and what effect this may have on exchange rates in the coming weeks, including the forecast and outlook for the best exchange rates in 2013.
Euro strength means GBP/EUR is quite low
The Euro has gained much strength in the last week, pushing GBP/EUR rates to their lowest in 9 months. A European Central Bank policymaker soothed investor concerns today however, that officials might take steps to undermine the currency’s recent strength.
ECB member Ewald Nowotny said the exchange rate was “not a matter of major concern”, contrasting with comments from Eurogroup head Jean-Claude Juncker who on Tuesday prompted investors to sell the euro by saying it was “dangerously high”. This is what caused the slight uplift in rates in the last 24 hours, but after the recent comments, the general downward trend has now continued.
UK Inflation: Could there be more Quantitative Easing on the cards?
UK consumer prices inflation held steady at 2.7% in December, official figures have shown this week. John Longworth, the director general of the British Chambers of Commerce, said however that he expected inflation to rise in the near term, as further rises in utility and food prices kicked in. Higher inflation is clearly a concern for the UK economy as it increases the squeeze on both businesses and consumers, further exacerbating an already weak economic environment.
Now usually, the Bank of England would combat this with higher exchange rates, and this in turn would strengthen the Pound. At the moment though, rates are at a record low of 0.5%, and there is little prospect of them being raised to head off rising inflation. Instead, they would likely do more Quantitative Easing, which many are rumouring will happen again this year. If so, there is a risk to the downside for the Pound as QE would weaken Sterling.
UK Credit Rating at Risk
There is more risk to Sterling than just QE however. Part of the reason rates have plummeted in the last week is the fact that the UK continues to risk losing its top AAA credit rating if it does not reduce its debt, as a senior figure at Fitch Ratings agency recently said. Fitch has had the UK’s AAA rating on “negative” outlook since March 2012, meaning that it is warning it may cut it.
If they do, it would mean the UK is a less attractive place to invest, and so this is weighing on the Pound and stopping any recovery in rates.
Pound/Euro Rates have been dropping for a while now, due to poor UK data and a stronger Euro. What will happen in the coming weeks depends on further UK data to come this month, and market reaction to the EU debt crisis. I do believe that longer term we will see rates recover as the UK economy picks up, however I think things may get worse before they get better.
If you are buying Euros, then you can place a ‘Stop Loss’ order, which is where we can secure your currency if it drops below a pre-agreed level. This means if rates improve you can still take advantage, but have a worst case scenario should the market continue to fall.
For those converting Euros back in to pounds, then if it were me I would probably take advantage of the 9 month high. It hasn’t got any better in the last day or two, and if we continue to get conflicting messages from the ECB, investors could sell off the Euro.
Regardless which currency you need to buy or sell, send me a free enquiry today to see how we can help you achieve the best exchange rates possible. I look forward to hearing from you.