Monday 9th June 2014
Good afternoon. Apologies for the blog being quiet over the last week or so, as have been out of the country. Much has happened in my absence however, with the European Central Bank (ECB) last week announcing a raft of measures aimed at stimulating the EU economy. Today I will cover what they did, and how it has affected the currency markets and exchange rates.
Pound/Euro hits 18 month high after ECB cut interest rates
In their announcement last Thursday, the ECB revealed they have cut its benchmark interest rate from 0.25% to 0.15%. They also announced negative interest rates and cheap long-term loans to banks in a bid to boost the economy and encourage banks to lend to businesses rather than hold on to money.
The ECB is the first major central bank to introduce negative interest rates and it is a little step into the unknown. The effect for exchange rates is a weaker Euro and the GBP/EUR rate rising to 1.24 which is the highest in 18 months.
Why has it weakened the Euro?
It’s due to the lower return for investors. With interest rates now at 0.15%, people are more likely to invest funds in somewhere with a higher return. This means that funds are moved out of the Euro into other currencies, and the lower demand weakens the currency and makes it cheaper to buy, hence the rise in the GBP/EUR rate.
Denmark did a similar thing a few years ago with the aim of weakening the Danish Krone, and the negative interest rate helped to stabilise the currency. For the EU there are 2 main benefits. The weaker currency helps to boost exports while making imports more expensive, which is helpful when inflation is too low.
The move was quite widely expected, and in my most recent post I predicted they would cut and the GBP/EUR rate would go up. Because it was widely forecast however, it was for the most part priced into exchange rates already which is why the upwards move for GBP/EUR was relatively small.
Do you need the best exchange rates?
Pound/Euro and Pound/Dollar are both trading at very good levels. Even if you don’t need your currency for some time, you can lock in the current rates for up to 2 years with a ‘Forward Contract’. You only lodge 10% of the total to be converted, and the remainder you keep until you need your currency. In this way you can guarantee your rate and protect yourself against a downward move in the market.
Regardless of which currency you need to buy or sell, I can provide a free consultation over the phone to discuss your requirements, provide you a quote, and explain the options you have available. In this way you can make an informed decision on when to fix your rate.