21st February 2011 – Euro versus Pound status
February 22, 2011 Leave a comment
21st February 2011 – The Euro versus Pound status and what could affect values during the coming week.
Last week was quite volatile as contrasting economic figures drove Sterling up and down against the Euro. Due to high inflation and robust retail sales, Sterling ended the week not far from a 3 month high against the Euro. As the chart illustrates, rates have increased by 3% since the end of last month:
To summarise the events of the past week, initially Sterling was buoyed by figures on Tuesday showing that inflation is yet again well above the Bank of England’s (BoE) target of 2%. This caused renewed speculation interest rates may be on the rise soon, and thus strengthened the pound. The gains were short-lived however, as high unemployment figures pushed Sterling back down again mid-week.
The upwards trend returned however later in the week, with robust Retail Sales on Friday and a BoE member calling for interest rates to rise sooner rather than later.
Interest Rates in the UK have been on the agenda for several weeks, as rising prices are causing inflation to spiral out of control. So how do interest rates affect the exchange rate? Well, as a rule of thumb low interest rates mean little return for investors and results in a weak currency. In normal times, banks would raise interest rates to combat inflation as a result from the economy growing faster than its sustainable rate. A rate hike is thus a sign of economic strength. Usually rumour and speculation of an interest rate hike increases the value of Sterling and exchange rates rise, and indeed this is what we have seen in recent months.
The Bank of England is well aware of the economic risks that inflation poses to UK economic growth. On the one hand Mervyn King has as usual been talking down the value of Sterling, while in contrast another member of the MPC has been calling for a rate hike for some time. So, the lack of consensus at the BoE over whether they want a strong pound or weak pound is doing little to stabilise expectations of when rates will rise.
Most analysts expect the soonest rates will rise will be in the summer. When interest rates do start to go up, it’s likely this will be the catalyst for a decent recovery in the value of the Pound. In the short to medium term however, due to the fragility of the recovery meaning interest rates need to stay low, exchange rates could well get worse before they get better.
We’re close to a 3 month high for GBP/EUR, and the last 4 times this happened the rate fell back again very quickly. For this reason if you need to purchase Euros and are worried about losing out, it may be wise to consider fixing a rate sooner rather than later to take advantage of the recent 3% gain. To put this into context €150,000.00 is over £4000 cheaper today than several weeks ago. Even if you don’t need your currency straight away, you can fix the current rate with a ‘Forward Contract’ where only a 10% deposit is payable initially, protecting you against adverse rate movements for up to 2 years.
If you have yet to open a trading facility to gain access to commercial rates of exchange click here to open an exchange rate account today and an experienced trader will be in touch to discuss your requirement and offer expert market knowledge.