Thursday 6th February 2014
Sterling has fallen below the €1.20 mark today for the first time this year. The reason for the fall was Euro strength following their decision not to raise interest rates. In today’s post I am going to look at the central bank decisions in both the UK and EU, and have a look at what this means for GBP/EUR exchange rates for 2014.
European Central Bank holds interest rates, GBP/EUR drops
The European Central Bank (ECB) has kept its benchmark interest rate at 0.25% today. The bank last cut rates to a record low in a surprise decision in November. Following low inflation numbers from the Eurozone in recent weeks, there was much speculation that the ECB would have to cut interest rates.
As this was quite likely, the cut was already priced into the markets. A cut would weaken the Euro due to the lower return on offer for investors, and so because many thought a cut was on the cards, the Euro weakened accordingly and Pound/Euro rates rose to €1.22 last week.
However after the announced no change to rates today, the Euro surged in strength, became more expensive to purchase, and this pushed rates just below the €1.20 mark as you can see from the chart below. Read more about today’s ECB decision here.
Bank of England leaves rates on hold
UK interest rates have also been kept unchanged at their record low of 0.5% by the Bank of England. This was widely expected and there was no effect on exchange rates.
Analysts now hope that the Bank will use next week’s inflation report to signal changes to its policy of forward guidance. There had been speculation that the Bank would issue a statement alongside the latest interest rate decision. However, in announcing the hold in rates and quantitative easing, the MPC said it, “reached its decisions in the context of the monetary policy guidance announced alongside the publication of the August 2013 Inflation Report”.
Where next for Pound/Euro exchange rates in 2014?
My view is that there is still a chance of the ECB cutting rates next month, so I think this dip in rates will be temporary.
Also if UK data continues to improve then we could see the Pound recover and get back to €1.21 / €1.22 in the coming weeks. This will be even more likely should further EU data mean analysts think that a rate cut may still happen.
If you need to sell Euros and convert Sterling, then you should give serious consideration to taking advantage of the 2 point move in your favour. Rates won’t drop much below €1.20, and I think that we will see it climb back up in the coming weeks.
If you need to buy Euros, then yes the rate may well increase. However much of the Pound’s strength recently is on speculation our interest rates may go up. Next week we have an inflation Report from the Bank of England, and I expect they may move the goal posts slightly with regards to a trigger for a rate hike.
So while rates may indeed go back up, this is by no means a certainty. So Euro buyers may wish to consider placing a Stop Loss order. This means you can fix a rate should rates drop further below a pre-agreed level, €1.19 for example. In this way you can still take advantage of any gains in the rate, but should we see a shock drop, you’re not leaving yourself exposed and risk losing out on the great buying levels we are currently seeing.
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