Thursday 7th April 2016
Good afternoon. With the Pound in perpetual decline at the moment, in today’s post I’m going to provide a more general view of the Sterling/Euro rate, and put things into perspective to explain why the current GBP/EUR levels are actually not too bad at all….
Why is the Pound falling against other currencies?
Last year, GBP/EUR rates were at 8 year highs of €1.40+. The reason for this was, firstly, a robust UK economy showing decent growth. This meant that the Bank of England were expected to raise interest rates and this potential higher return attracted investment into the Pound, strengthening Sterling to record highs. Secondly, the Euro was very weak. The well-publicised issues in Greece along with a raft of QE stimulus measures for the Eurozone combined to weaken the Euro and pushed exchange rates to highs of €1.40.
Fast forward 5 months and it’s a very different picture. GBP/EUR rates are now sat at €1.2380; almost 15% lower than the peak of last year. There are 3 main reasons for the drop in rates:
- A slowdown in the global economy – which became clear at the turn of the year. With Chinese growth slowing sharply, the knock-on effect for the global economy is significant. This has in turn affected growth prospects for the UK, meaning little prospect of a UK interest rate rise any time soon.
- Investor Sentiment – with China slowing, and oil and equity prices falling, investors have got the jitters. In uncertain times ‘safe haven’ currencies like the US Dollar, Yen, Euro and Swiss Franc become stronger and more expensive to buy. This also caused the FTSE to suffer heavy losses, further adding to the decline in the value of Sterling.
- The EU referendum – with the UK going to the polls in a few months to decide on the future of their EU membership, there is a huge amount of uncertainty about what a ‘Brexit’ would mean for the UK economy. It’s an unknown, and markets hate uncertainty. As such, the Pound is starting to be sold off, weakening against other majors. Major Banks have warned Sterling could fall by a further 20% in the event of the UK leaving.
Putting things in perspective
It’s natural for those looking to buy Euros to compare the current levels with the recent memory of €1.40; however, when you actually look at how the rate has moved historically, the current levels are actually not that bad.
When you look at the charts, you will see that the current levels are actually around the same as they were at the start of last year which, at the time, was a 6 year high. Last year’s peaks were an anomaly, as there was every reason to sell the Euro given the problems the Eurozone were having. The market has simply reversed these gains back to where we were. Furthermore, even if the UK votes to remain in the EU, don’t expect rates to snap back to €1.40 again. The Euro isn’t inherently weak anymore and the global slowdown that has been affecting Sterling is likely to remain.
Buying and selling currency at the best rates
If you’ve read this far, well done! You now have a broad outline of why GBP/EUR rates were high, why they’ve fallen, and that there is an inherent risk of further significant volatility in the currency markets. You will also have learnt that, in context, the current levels are actually not that bad.
I would imagine those reading my blog today would like to achieve the best possible rates of exchange. Simply watching the rate drop and hoping it will go back up is not a sensible approach to making the most of your currency. I am happy to provide a free consultation to any clients that need to buy or sell foreign currency, at the best rates, and provide you with the different options and strategies you can consider; such as the various contract types we offer that protect against adverse exchange rate movements.
Click below to send me your details, and I’ll get in touch to provide a quote and explain the mechanics of how our service works. I look forward to hearing from you.