Tuesday 10th September 2013
Good afternoon. Since my post last week, the Pound continued to rise, however now seems to have hit the peak and we haven’t seen further gains. In today’s post I’ll have a look at recent economic data, how it’s affected exchange rates, and what to look out for in the next week that is likely to move the currency markets. In today’s report:
- Pound fails to break through €1.19 level
- UK economy is turning the corner
- US jobs data disappoints, sending GBP/USD higher
- Upcoming data that might push rates higher or lower
Has Pound/Euro peaked or will it go higher?
The last few months have been good for the Pound, with lots of good economic data giving Sterling strength, and help exchange rates recover close to where they were back in January. At the end of last week the GBP/EUR rate peaked at just over €1.19.
Since then things seem to have stabilised. We saw rates slip away to €1.18 yesterday, and today we have seen a mild recovery to €1.1850 against the Euro, and so the rise has ended. But does this mean it’s the peak or will rates continue to climb to €1.20 and above?
Firstly let me say that nobody can predict the markets. If I could then I would be a billionaire and sat on my yacht rather than sat at my desk on the trading floor! What I can do however is explain what has moved the market, and the arguments for what could move the rate up or down in the coming weeks and months.
Sterling is range-bound between 1.18 & 1.19
So, last week Sterling pulled back from a 4 month high against the euro on after some poor UK data releases. UK industrial output fell short of expectations and the trade deficit unexpectedly widened sharply. The figures mean that the recent consistently strong UK data has come to an end, and it has also led investors to bring forward expectations of when interest rates would rise.
Also last week the Bank of England made no new attempt to talk down borrowing costs and this means that rates could rise much sooner than the central bank has flagged, possibly as early as late 2014. By contrast, the European Central Bank said it was ready to lower interest rates. This has helped the Pound remain strong and the Euro weak.
The UK economy is “turning a corner”, Chancellor George Osborne has said in a speech in London. Mr Osborne cited “tentative signs of a balanced, broad based and sustainable recovery”, but stressed it was still the “early stages” and “plenty of risks” remained.
Also helping the pound are recent surveys on UK manufacturing and services which indicate economic growth may accelerate in the second half of the year. So on paper the UK economy is looking good, so why isn’t the Pound rising any more?
The currency markets move on rumour, and as the economy is expected to continue to recover, this is already priced in to the market, so even if we keep getting good data it’s not going to much of a surprise, and the market now seems to have peaked and is unable to break through the €1.19 level.
If you are buying or selling Euros, find out about our rates by clicking here.
So if you are buying Euros, do you fix a rate now or wait?
Ultimately only you can make this decision. Given however that rates are close to the best they’ve been since the end of January, I think that holding out for a higher rate could easily mean you lose out on the current levels should we see the Pound weaken again. By hanging on, you could be holding out for an inch and risk losing a yard So if I needed Euros in the next 6 months I would do one of two things.
One option is to fix the rate now. It’s a very good rate, and means you are taking advantage of the recent rise in the value of the Pound. Even if you don’t need your Euros now, you can fix the rate for up to 2 years with a Forward contract, and only lodge 10% of your Sterling now, the remainder when you want the Euros transferred.
The second option is a Stop Loss order. If you are hoping the rate will go higher, this allows you to do this but not risk losing out should the market move against you. This works by placing a lower level, 1.17 for example, and should the market drop below this we automatically buy your currency and fix your rate.
In this way you can continue taking advantage of any gains, but have a ‘worst case scenario’ or safety net so you know the worst rate you will get should Sterling start to drop.
Pound/Dollar rates rise
The mediocre jobs report may add fuel to the argument that the US economic recovery is not yet robust enough to sustain itself without the additional help of the Fed – more QE would mean the Dollar could weaken further.
Also it now looks like military action in Syria may not happen, and if it does it’s some way off. This has added some stability to the markets, oil and commodities have fallen, and investors have moved away from the safety of the Dollar and into riskier assets, all of which mean a higher GBP/USD rate.
Economic data for the next week
If I was buying or selling currency in the next week, there are a few data releases I would be keeping an eye on:
Wednesday – We see UK jobs and unemployment data, which could affect the Pound depending on whether it’s better or worse than expected.
Thursday – UK inflation is released today, and because it can impact interest rates, it often affects exchange rates. Also today we have a speech by the ECB president Mario Draghi, and his comments often affect GBP/EUR rates. US unemployment data is also released today.
Friday – US Retail sales and Inflationary measures may affect GBP/USD rates.
If you need to buy or sell currency, would like to find out about our rates, or would be interested in discussing the market to help you decide when to fix your rate, click here to send me a free no obligation enquiry.