GBP/EUR gains unlikely as UK interest Rates set to remain low

Wednesday 29th October 2014 
Pound/Euro rates have slipped slightly in the last 24 hours, bringing the mid-market rate down to €1.2647. While a little lower than the recent 6 year high, it’s still a very attractive buying level for Euros given that last summer rates were as low as €1.14. 

GBP/EUR gains unlikely as UK interest Rates set to remain low 

Part of the reason the Pound has failed to go any higher against the Euro is the fact interest rates are no longer expected to go up any time soon. Reinforcing this view was a speech this week from the Bank of England (BoE) deputy governor Jon Cunliffe. 

In it he said that interest rates can be kept at their current record low level for longer than first thought, saying that weak pay and lower inflation, coupled with slower UK growth and slowdown in the global economy meant the BoE should remain “cautious”. 

So with rates now set to remain at their record low of 0.5% for quite some time, it’s hard to see what would push Sterling exchange rates higher. Those that need to buy Euros should therefore consider locking in a rate now while it is still close to the 6 year high. 

Those selling Euros however should be cautious. While the Pound is unlikely to gain, a deterioration of the EU economy could weaken the Euro, meaning less Pounds for those that are converting the single currency back to Sterling. 

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Pound/Dollar set to drop? 

GBP/USD has been on the way down for a few months now, dropping from $1.72 to $1.60. Currently rates hold firm around $1.6140. However the US Federal Reserve is expected to announce the end of its quantitative easing (QE) programme later, and this could strengthen the Dollar, make it more expensive to buy and pull the GBP/USD rate down further. 

The FED has been gradually cutting back the scheme, which began in 2008, since late last year. The end of QE, assuming it does indeed come, will nonetheless be an important milestone in the repair of the US economy and likely strengthen the Dollar. 

Whether it makes a difference to the GBP/USD rate however remains to be seen. As it’s widely expected to happen, it will be priced into the rate already, but it’s impossible to know by how much. I wouldn’t be surprised to see rates drop below the $1.60 level throughout the rest of 2014. 

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