Since last summer, Sterling has strengthening by around 7%. This is very welcome news for buyers from the UK purchasing property in the Eurozone. To put this in to real terms, a typical property purchase of €300,000.00 is now £20,000.00 cheaper than 6 months ago.
In today’s post, we’ll take a look at the Pound’s fortunes since the EU referendum, what 2018 could have in store, in addition to tools you can use to help you achieve the best possible exchange rate. If you need to buy or sell currency and would like the best rate, get in touch today for a free quote.
How has Sterling fared since the referendum?
Just before the vote, when all indications were that the UK would remain in the EU, GBP/EUR was trading at around €1.30. When the actual result came, the Pound weakened significantly, dropping by around 15%. Since then, we have seen mixed fortunes for the Pound.
This time last year, when Theresa May called a General Election, the Pound recovered most of these losses, rising to almost €1.20 against the Euro. This was based on polls indicating that the Conservatives would win a huge majority, and thus have a good hand in Brexit negotiations. As with the EU referendum however, the polls were wrong; May lost her majority and as a result, the Pound fell. 6 months ago, GBP/EUR was as low as €1.07, but since then we have seen the Pound perform very well indeed as you can see from the chart below:
Some of the initial fears that the vote to leave the EU would cause a recession, a million job losses, and have a negative impact on the economy proved to be largely unfounded. Indeed, the UK economy continues to perform relatively robustly. Unemployment is the lowest since the 1970’s, the economy continues to grow, and manufacturing production is at its highest in decades. The fact is that Sterling has been rather undervalued, and the main reason for this is the uncertainty caused by the on-going Brexit negotiations.
Progress is slowly being made however, and as a result some of this fog of uncertainty has started to lift, helping the Pound to recover. It’s also likely that with UK wages now growing at the fastest levels in more than 3 years, and crucially now more than inflation (2.5%), the Bank of England will soon start to raise interest rates; the prospect of higher rates also helps a currency due to the higher return on offer.
Will the Pound rise further in 2018?
With the Pound now sitting at its best levels since last summer, will it continue to rise further? This is impossible to forecast precisely of course, and much will depend on whether the economy continues to perform, coupled with the on-going UK/EU negotiations. Markets hate uncertainty, and until we see what a future UK/EU relationship will look like, including a future trading arrangement, it’s unlikely the Pound will make further significant gains. If however it looks likely that both sides start to make concessions, then the Pound could rise further. The road is a long one however, and as the chart illustrates, we have seen rates at similar levels several times over the last 6 months, without being able to go any higher.
Tools you can use if you need to buy Euros this year
There are 2 mains tools that we can offer our clients when the market is moving in your favour as it is now. The first of these is called a ‘Stop Loss’ order. This is where you instruct your broker to buy your currency if the exchange rate drops below a pre-determined trading level. This allows you to hold out for a better rate, and enable you to take advantage should the market continue moving in your favour. This contract is perfect for budgeting for a property purchase, as it gives you a worst case scenario.
Those that are more risk averse and do want to take any risks, should consider a ‘Forward Contract’. This allows you to freeze the current rate for up to 2 years, by lodging a small deposit with your broker. This means you can take advantage of the current 10 month high, and be protected against the rate dropping off again, as has been the trend over the last 6 months. A forward contract is perfect if you don’t need to convert your currency immediately but you want to avoid the risk of sudden fluctuations in exchange rates, however you can’t take advantage of any further gains in the rate should the Pound strengthen further.