Monday 2nd September 2013
Good afternoon. It’s been a good start to September for Sterling, with further strong economic numbers giving the Pound a boost to its highest against the Euro in 3 months. In today’s post I will take a look at the recent good run for the Pound, and also whether exchange rates will go up or down in the coming weeks and months.
I will also look at UK growth forecasts, the effect the new Bank of England governor has had, and also how any strike on Syria might affect the currency markets. So in today’s report:
- UK Manufacturing lifts Sterling.
- Pound/Euro rates at a 3 month high
- UK growth forecasts looking good
- UK and EU Interest Rates
- How military action in Syria could affect exchange rates
UK manufacturing lifts GBP/EUR to a 3 month high
UK manufacturing has continued to grow, and is now ‘booming’ according to a survey by the British Chamber of Commerce. The sector has seen its strongest growth in activity for over 2 years, and has now seen 5 consecutive months of growth.
This is very good news for the UK economy, and indeed analysts have welcomed the figures, adding that the data supported growing optimism over prospects for the economy as a whole. The economy appeared to be “running way ahead” of the forecasts, Mr Wood said, and this also strengthens the view somewhat that interest rates could go up within a year or so.
The effect on the currency markets was a positive one for anyone that needs to convert Sterling to a foreign currency. As you can see from the chart below, this caused a spike in GBP/EUR exchange rates at 09:30am when the data was released.
Exchange rates to buy Euros are now at their highest in 3 months, so if you need to buy Euros then now is a good time to consider your options and decide if you want to fix a rate while levels are very attractive.
UK growth forecasts are up
The British Chambers of Commerce (BCC) has sharply upped its 2013 growth forecast, saying the economy is gaining momentum. This is another reason for the good performance of Sterling at the moment. It’s important to note however that the BCC also warned of overseas risks to the more positive outlook, notably those posed by the Eurozone, the Middle East and China’s slowdown.
“Unfortunately the recovery is not yet secure,” said BCC head John Longworth. “We have had false dawns in recent years and although this upturn appears to be on stronger ground, we must be aware that complacency could lead to setbacks,”. So while rates are good at the moment, the recovery in the UK still depends on global factors, and it wouldn’t take much for rates to drop again – remember it was only a month or so ago rates were at a 2 year low, so if I needed to buy Euros in the next 3 months, I would consider fixing the rate sooner rather than later.
Bank of England’s MPC receives praise
The Bank of England (BoE) Monetary Policy Committee has received praise for its recent adoption of “forward guidance” – providing explicit advance warning of when interest rates might rise – which the BCC said helped provide businesses with more confidence to plan and invest. You can read a very good detailed article on Forward Guidance by the BBC’s Stephanie Flanders here. ECB and
BoE & ECB Interest rates
This Thursday both the Bank of England and European Central Bank announce their decision on whether interest rates will change, and for the BoE, whether they will pursue any more Quantitative Easing.
Now I don’t expect any change from either bank, and no further QE. What will be interesting however is any comments that come along with the decision – these could well affect Pound/Euro rates depending if comments are perceived as positive or negative by the markets, so this is something to keep an eye on should you have an imminent requirement to buy or sell currency.
Syria & the effect on exchange rates
The on-going civil war in Syria has been dominating the headlines over the last week. At one point it seemed there would be imminent strikes against the Syrian government, however following the vote in the UK parliament that effectively rules us out of any action, it seems the US has followed suit and are seeking approval from congress before launching any action.
So how would any strikes affect exchange rates? Should the US go ahead with France and launch missile strikes, then the first effect this would have on the markets would be an increase in commodity prices, oil in particular. For the currency markets, the uncertainty any strikes would create would probably strengthen safe haven currencies like the US Dollar and Swiss Franc. Conversely riskier currencies such as the Pound could weaken.
So should we see an escalation in the middle east, I would expect Pound/USD rates to drop as investors seek safe haven currencies.
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