Wednesday 18th December 2013
In my last post I outlined the data this week that I thought would have an impact on exchange rates. I pointed out that today (Wednesday) would likely cause changes in currency rates due to some key data including Unemployment and the latest Bank of England (BoE) minutes. Unemployment was lower than expected pushing the Pound higher, but comments from the Bank of England threaten to put the brakes on the Pounds rise. In today’s post I’m going to take a detailed look at what has happened, and what it means for the exchange rate forecast.
UK unemployment falls, Sterling rises.
The UK unemployment rate has fallen to its lowest level since 2009, official figures from the Office for National Statistics (ONS) showed this morning. The market expected a figure of 7.6%, however the actual number came in at 7.4%; the lowest rate since February 2009. As a result, the Pound has risen against the Euro by 1 cent to €1.1915, and also by a cent against the US Dollar to $1.64.
As the chart above shows, the news gave Sterling a boost and caused exchange rates to rise, as I predicted would be the case on Monday. So why exactly did the Pound gain?
This 7.4% rate compares with a figure of 7.6% for the three months to September, and is below the rate analysts had expected. The Bank of England has said it will not consider raising interest rates from their record low of 0.5% until the unemployment rate falls to 7%, so the fact that we are getting closer to the 7% target means interest rates in the UK could rise sooner than expected.
Higher rates of interest attract investment due to the higher return, and this means demand for Sterling causing it to rise in value, and in turn push exchange rates up. However, the BoE governor Mark Carney has said an interest rate increase is not guaranteed even when unemployment falls to this level. Indeed as we will see in a moment, the BoE could even move to weaken the Pound in the coming months.
BoE say that Sterling strength not good for the UK
So the Pound is strong, exchange rates are rising, the economy is growing, so all is well right? Not necessarily. Sterling’s recent strength risks derailing Britain’s recovery and could jeopardise attempts to rebalance the economy, the Bank of England said this morning.
The nine members of the Monetary Policy Committee (MPC) said while sterling’s gains over the last 4 weeks reflected a stronger economic outlook, further rises could harm export growth. You can read the full minutes yourself by clicking here.
Half our exports go to the Eurozone and so if the Pound gets much stronger, our goods become more expensive and so our recovery could start to falter.
“Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery,” minutes from the Bank’s December meeting showed.
Sterling is at a five year high on a trade-weighted basis, where it is measured against a basket of other currencies, and the Bank said that for Britain’s “burgeoning” economic recovery to be sustainable, it needs to rely more on business investment and exports and less on consumer demand.
So you have been warned; this is the clearest signal I have seen yet that the BoE may move to devalue Sterling as they did in the summer of 2012 when rates fell from €1.30 to €1.14.
Summary – when should you fix your rate?
On the one hand the UK economy is good, the Pound is gaining value, and this could continue should economic numbers continue to impress. This would be good news for those that need to buy Euros, but not so good for those looking to convert back into Sterling.
On the other hand, if the Pound gets much stronger, might we see the Bank of England move to devalue the Pound due to the reasons I have outlined above? This would lower exchange rates, meaning it could be wise to fix a rate soon while it’s on a high.
There is no way to predict what will happen, but if you need to make the most of your exchange, having a good currency broker on your side can make a huge difference. In addition to helping you achieve rates up to 5% better than banks can offer, I can explain various options and contract types that I have available, that can protect you against rates moving against you, while still allowing you to take advantage if the market moves in your favour.
The first step is to send me a free enquiry by clicking below. I can then have a brief discussion regarding your requirements, explain the options you have, and enable you to make an informed decision on when to fix your rate of exchange.
I look forward to hearing from you.