Tag Archives: foreign currency
Where next for GBP/EUR?
The euro has continued to gain strength against Sterling despite the on-going concerns surrounding Spain and Greece. Currently the focus seems to have shifted onto the UK and as highlighted in my previous blogs this was always going to bring about a negative reaction in the markets, due to the problems our own economy continues to face. Quite frankly, it seems as if the UK is moving backwards, or at best stagnating. The warning signs have been there for months, as PMI data has been consistently poor and the Bank of England cut growth forecasts on what seemed like a monthly basis. We have seen multiple rounds of Quantitative Easing to try and boost lending but with our banking sector causing more problems than they are solving, it seems to have made little difference. Add to this continuing high unemployment and the widest trade deficit since records began and you can see why analysts are predicting the pound to come under increasing pressure over the coming months. However, despite all of these negative points mentioned above we are still only 2 cents away from the four year highs that we experienced only recently on GBP/EUR exchange rates and to me this still presents an excellent buying opportunity.
I feel it is paramount to understand where Europe may be heading next before we can really understand which direction GBP/EUR rates might take over the coming months. The answer to that question may be easier to answer after September, which could well prove to be a defining month for the EU. With the Spanish banking system in need of further bailouts, it is the handling of this situation and the repercussions of any further monetary assistance, that could prove pivotal to one of the EU’s largest economies dragging itself above water. We also have Greece coming under the spotlight once again and any decision on an extension to their debt programme or elimination from the EU, will have a significant impact on GBP/EUR exchange rates and could provide Sterling strength, if not handled with the up-most caution by EU leaders.
Personally i feel that anyone buying euro and waiting for 1.30 may be left dissapointed, unless their is a shift in public perception on the UK economy and/or further fallout in the EU. I feel the EUR will find resistance at 1.25, whilst any move through 1.28 will not come until we hear further reports from Spain and Greece.
EUR/USD moving away from all-time low
The EUR has continued to move away from the all-time lows it had experienced during its darkest hours. Concerns were rife that the USD would push below the 1.20 level, which was at least providing some kind of resistance. Thankfully for all those holding the single currency it has actually continued to rally away from this low and today pushed through the 1.26 barrier for the first time in months. The USD has not performed well across the board as fears grow that further rounds of Quantitative Easing are on the cards and with market unrest due to the upcoming presidential elections, I feel a move through 1.30 is feasible providing Spain and Greece don’t find themselves in further trouble over the coming weeks.
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After the unsurprising downgrade of the US investors and the confirmation that European bonds will be purchased by the ECB investors are again trying to judge where the losses will be seen. On the US news markets have already lost out as the cable (GBPUSD) moves up over a cent over the weekend. Sterling seems to already started on a loss as the euro plan to buy bonds adds some confidence to the euro.
Many investors have been calling for such a move from the ECB with requests for a European Bond. This story will continue to be speculated on as the wide sell off continues today on the markets. Also watch out for the NZD/AUD/ZAR as all have large gains due to the closing of Carry Trades. A Carr trade is a tool used by a number of financial institutes, they borrow money in a low yielding currency in invest in a high to take the benefit on the difference of the exchange rate. For example borrow in the UK for 1% and invest in South Africa with a 8% return. The only issue is as the market are wary of risk these positions are being closed and brought back.
For more information on the markets stories and how it could affect you contact me through HSE@Currencies.co.uk
I personally believe once of the biggest drivers for exchange rate movement this year has been the race between the UK, US and the Euro zone as to who will raise interest rates first. At the beginning of the year the UK looked the strongest with economic figures showing a marked improvement however recently inflation has climbed along with unemployment changing the growth forecast in the UK and therefore weakening the likelihood of a rate increase.
The Euro zone has recently become the clear favourite and many are expecting a rise as soon as next week which in turn has strengthened the euro to the strongest rate against sterling for nearly 6 months. This has been down to continue growth in the largest countries and rising inflation as prices worldwide continue to climb. Next week could see rates improve further for the euro so anyone with a GBPEUR or USDEUR may wish to avoid the risk of further losses.
On the other side of the coin you have Portugal as mentioned in Jonny’s blog below that could raise risks across the Euro zone and could push back a rise for yet another year. Either way I cannot stress the importance of using a broker over the bank on all money transfers. They can normally provide savings of up to 4% and can help you time the exchange you need to maximise the exchange rate.
This afternoon the pound has weakened significantly against a basket a major currencies as we get closer to the UK inflation report tomorrow. This report given by the Bank of England (BOE) quarterly gives key information about inflation in the UK as well as their thoughts and predictions on what they expect Q4 GDP figures to show. Both of these are key to the forecast for sterling and therefore the strength of the pound effecting individuals and businesses looking at completing a money transfer in a short and medium timeframe.
Currently inflation stands at 3.1%, significantly higher than the government’s aim of 2%. Traditionally inflation is seen as a good thing for investors as it normally leads to interest rate hikes. In the UK with a recovery so dependent on a strong housing sector this in my option is out of the question, hence the BOE’s Quantitative Easing program earlier last year. In my option there is little more that the BOE can do to lower inflation, however if you are looking to sell pounds and buy for example euro’s this is exactly what you should be hoping for, an inflation figure lower than 3.1%.
With regards to GDP figures this is also key as it shows their thoughts on the overall health of the UK. Q4 figures are especially important as it equated for a large proportion of our overall GDP. This is because of Christmas shopping as the retail sector equates for nearly 60% of our GDP. Again people looking to sell pounds and buy a foreign currency should be hoping for a positive figure from the BOE as this will improve exchange rates and foreign currency forecast’s.
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