Pound up, Euro weakens, Dollar strengthens – forecast 2014

Tuesday 26th August 2014 
Good morning and welcome back after the long weekend we enjoyed in the UK, despite the dismal weather! The Pound/Euro rate however is anything but dismal, having recovered today when UK markets opened. This is more to do with weakness in the Euro that I shall explain in a moment, in addition to looking at why Pound/Dollar rates dropped. I will also outline what data released we’re looking at this week that could affect exchange rates. 

Sterling/Euro rates up, but not due to the Pound 

Over the weekend there was a meeting with the US and EU central bank chiefs in the United States. There were some interesting comments from the European Central Bank (ECB) president Mario Draghi that has caused the Euro to weaken. 

Unlike the UK, Europe is still struggling to grow and they are facing a problem of very low inflation. Usually you would lower interest rates to combat this, but rates in the EU are already at a low of 0.15% so they can’t cut it any further. So what I expect them to do is look at other stimulus measures, much like the Quantitative Easing we saw in the UK. 

His comments over the weekend hinted at this when he said that they would “use also unconventional instruments to safeguard the firm anchoring of inflation expectations over the medium- to long-term.” Adding that they would “use all the available instruments needed to ensure price stability over the medium term.” 

Markets have taken this as the clearest signal yet that they may indeed have to create money to pump money into the economy. If so this would weaken the Euro, and this has started to get priced into the market and the Euro has weakened off, causing the Pound/Euro rate to recover back towards to €1.26 level.

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Pound/Dollar rates drop 

Again this was not due to Sterling, it was due to the US Federal Reserve Chair Janet Yellen being very positive about the US economy, their growth and unemployment levels, and the fact they will continue winding up their stimulus program, all of which points to the USA raising interest rates next year. As a result, the Pound/Dollar rate dropped as the US Dollar became more expensive to buy. 

This week’s data releases 

Tuesday 26th Augusttoday has been quiet in terms of economic data, with only US figures of note. We’ve seen good orders higher than expected compounding the strength of the US Dollar. 

Wednesday 27th AugustYet another quiet day, and while there are some minor releases, there is nothing that I think should affect exchange rates. 

Thursday 28th AugustIt is quiet again in the UK with nothing of interest other than some consumer confidence figures at midnight. In the EU however, Germany (Europe’s largest economy) has a raft of unemployment and inflation data. Over in the United States we have Gross Domestic Product figures, Jobless Claims and Home sales, all of which could affect GBP/USD rates. 

Friday 29th AugustThe only UK release is a measure of business investment, but with a lack of other UK data this week it may have a larger effect than normal. Elsewhere we have EU inflation and unemployment, Canadian GDP figures, and income and expenditure figures from the USA. 

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