Interest Rate Co-ordination and effect on exchange rates

For the past month Pound/Euro rates have been stuck in a range half a point either side of €1.1350. The last week has seen a little more volatility, with mixed messages from central banks whipsawing the rate as low as €1.1250 before recovering yesterday back to the level it’s been comfortable at for some time.

Much of the Pound’s woes of late have been caused by political uncertainty caused by the general election. There now seems to be an air of stability with the Conservatives having formed a minority government, and so the past week saw focus shift from politics to news from Central banks.

Interest Rate Co-ordination? 

Having worked in foreign exchange since 2006, I can say that historically, interest rate movements used to be one of the main things that affected currency prices. Since the financial crisis however, interest rates have remained fairly stagnant. In 2007 rates were as high as 5.75%, however just 2 years later they were at 0.5%. In early 2009 we saw a global, co-ordinated emergency interest rate cut when the BoE, ECB, FED and other major central banks all moved to cut rates in an unprecedented move in an attempt to ease the financial crisis, and not much has changed since then. Fast forward 9 years to this week, and we have seen a similar co-ordination when a forum on Central Banking in Portugal was attended by the heads of Central Banks including the EU, UK, Japan, US and Canada.

Only last week the BoE Governor Carney said it was not the time to raise interest rates, however he has changed his tune, indicating that a rate hike may be needed later in the year and that it would be debated at upcoming meetings. It looks to me that following the meeting of central bankers, a co-ordinated tightening of monetary policy could well be on the cards in an attempt to arrest rising inflation. The BoE are hinting rates may need to rise, the ECB have sent mixed messages but the consensus is that they will also be withdrawing stimulus sooner or later. The US are widely expected to raise rates again soon and other central banks may also follow suit. It makes sense; raising rates typically constrains an economy, but by acting in unison, they may eliminate risks that could arise should a move be made in isolation.

What does this mean for Sterling/Euro? 

Nobody can predict what will happen with exchange rates of course, but for clients purchasing Euros with Sterling, it should raise alarm bells. On the one hand, rising UK interest rates would normally strengthen a currency, however if banks will move together, then any gains for the Pound will be neutered. Of more concern will be a resurgent EU economy and any tapering of ECB stimulus. There are still many doubts about Sterling, not just politically but with regards to what effect Brexit will have on the value of the Pound. A resurgent Euro could well provide a vehicle for investors to place funds as the cloud of uncertainty continues to exert downward pressure on Sterling. This could cause the single currency to continue strengthening and becoming more and more expensive to purchase, pushing GBP/EUR lower.

We are witnessing extremely volatile times in the currency markets, and if you need to convert one currency to another in the coming 6 months, a prudent approach would be to speak to one of our expert brokers and discuss the tools and options available to help protect you against adverse exchange rate movements. Don’t simply sit back and hope exchange rates will move in the direction you want them to. Hope is not a reliable economic tool.

Today’s Data 

There are a few interesting things that could move exchange rates today. In the UK the latest GDP figures will be released at 09:30am, and are expected to show a quarterly growth of 0.2%. If the actual figure differs then the Pound will move accordingly. Sterling/Euro could also be affected by the latest EU inflation numbers at 10am. Elsewhere, the US has a raft of income and expenditure numbers and Canada has its GDP release at 13:30pm, expected at +0.2%. In addition to the above data, month end flows and any Brexit developments may also affect Sterling. Also, next week 4th of July falls on Tuesday, meaning many US market participants will take Monday off resulting in thin trade and potentially more volatility than usual at the start of July.

Have a good weekend. 

Complete the form below to get a free quote.

Leave a Reply

Your email address will not be published. Required fields are marked *