Wednesday 7th August 2013
Good afternoon. Today has been extremely volatile on the currency markets with Sterling surging higher against other currencies. The new Bank of England governor Mark Carney addressed Parliament and delivered his Quarterly inflation report.
After months of decline for Sterling, the Pound has surged against other currencies today, so in my post this afternoon I will analyse what he said, the impact on the economy, why it caused exchange rates to rise, and what this means for exchange rates going forwards.
‘Forward Guidance’ from the Bank of England
The new Bank of England (BoE) governor Mark Carney today addressed parliament, giving his quarterly inflation report, his first since taking over the helm last month. It was already widely expected he would outline his new policy of ‘Forward Guidance’ and indicate that interest rates would remain low for some time.
How did it affect exchange rates?
As you can clearly see from the chart, when the speech started at 10:30am, Sterling immediately dropped quite significantly, as had been expected. You can see the dip at 10:30am this morning when Pound/Euro rates fell from 1.1530 to 1.1440.
The dip was not to last however, and very quickly the Pound recovered its losses, and kept on going. Again looking at the chart you can see the exchange rate rocketing higher, above where it started the day, and eventually levelled out around 1.1645 against the Euro.
So why did the rate drop, and then make a huge recovery?
Firstly the reason it dropped was speculation that he would indeed say interest rates would remain low for some time. Market analysts, myself included, have been saying for some time that if he did indeed say interest rates would remain low, expect Sterling to drop, and initially this is indeed what we saw.
The reason there was such a massive bounce back was the terms that he outlined as parameters for when rates would start to rise. He pledged to keep them on hold until the official unemployment rate fell below 7%. This is his ‘forward guidance’. Under its central forecast, though, the Bank does not expect unemployment to fall to 7pc until September 2016. So in effect, he’s saying interest rates will remain low for another 3 years.
So you would have expected the Pound to fall further on this news, however Economists said traders were expecting a much tougher target than 7 % unemployment, hence the reason for today’s robust performance for Sterling. The Institute of Economic Affairs said Mr. Carney’s forward guidance was “the most dangerous development in UK monetary policy since the late 1980s”. So experts are mixed on the effect it will have.
So what does this mean for the economy?
If rates do remain on hold until 2016, they will have been at their record low for nearly 8 years. The last time this happened was the 12 years that spanned the Second World War and the period of austerity that followed.
The economy does seem to be recovering however. Recently we’ve seen good Retail Sales, good growth figures, strong manufacturing and industrial production, good growth forecasts and decent house price increases. And although welcoming the recovery, Mr. Carney stressed that it “remains weak by historical standards”.
“There is understandable relief that the UK has begun growing again. But there should be little satisfaction. Much is at stake as we seek to secure the recovery and return inflation to target,” he said.
The Bank expects inflation to remain at 2.9pc this year, fall to 2.4pc by the end of 2014 and hit 2pc in late 2015. The Bank stressed that it will keep the stock of quantitative easing steady at £375bn until the end of 2016 as well, and could increase it if the economy slipped backwards.
You can read a detailed report here on the BBC website of what he said and the impact on the economy.
What does this mean for exchange rates?
Right now this means good buying opportunities for anyone that is buying a foreign currency with Sterling. The gains are a surprise to the market, and so if you need to buy currency, consider taking advantage of the gains we have seen. We can fix your exchange rate for up to 2 years into the future, and you only lodge 10% of what you want to convert now. This protects you from the rate falling.
Moving forwards much will depend on economic figures. If they start to disappoint, then we could still see further QE from the BoE which would cause the Pound to fall back away.
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For those selling converting currency back in to Sterling, rates are now moving against you. A week ago the Euro to Pound rate was close to a 2 year high, with Forward guidance in place and the economy recovering, further good figures could mean the rate gets worse for you.
Selling property abroad and want the best Euro to Pound rate? Make a free enquiry now and find out about your options.
How to get the Best Exchange Rates
The first step is to send me a free enquiry by clicking here. I can discuss your requirements in detail, run over the options you have available, and help you decide on the optimal time to convert your funds. This means you can make an informed choice on what is best for you.
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