A deal has now been done with the Conservative government and the DUP. The news has helped the Pound rise a little but not by much, as the deal was widely expected and already priced in to the market for the most part. As you can see from the chart below, Pound/Euro rates have been stuck in a range between €1.13 and €1.14 for the last few weeks:
The rate would be much lower if it wasn’t for hawkish comments from some Bank of England members last week, suggesting an interest rate hike may be on the cards later this year. If they do raise interest rates from their record low of 0.25%, then it’s likely that the Pound would rise due to the higher return on offer for investors.
Sterling unlikely to move much higher due to Brexit uncertainty
We’re not expecting Sterling exchange rates to rise in the short to medium term however. Recent economic data has been pointing to a slowdown in the economy, and if this continues to be the case, then it’s less and less likely the BoE will raise interest rates. Of much more importance will be how the Brexit negotiations are perceived to be progressing.
The first few days of talks haven’t been particularly positive, and if differences continue to materialise then it would suggest that the talks will be drawn out and make little progress in the coming weeks and months. Eventually the Pound will make gains once it becomes clearer what UK/EU deal will be made, however in the short to medium term, there are more downside risks for Sterling than anything that’s likely to push the Pound much higher.
Guaranteeing a fixed exchange rate
If you need to buy Euros in the next 3 months, for a property purchase in the EU for example, then one way you can protect yourself against the rate getting worse is by using a ‘Forward Contract’. This allows you to freeze the current rate of exchange for up to 2 years, by lodging 10% of the total to be converted as a margin against your trade. You then have a guaranteed rate and are able to budget more effectively. Forward contracts are increasingly popular for those that know they will have a currency requirement in the coming months, and want to know exactly what it will cost in Sterling.