Pound/Euro forecast April/May 2013 ahead of UK GDP figures

Monday 22nd April 2013 

Good afternoon. Since my post last week, there has continued to be volatility in the currency markets. Mid-week last week we saw poor UK Retail Sales and unemployment data weaken the Pound, causing exchange rates to fall. The GBP/EUR rate recovered towards the end of the weak due to rumours of an EU interest rate cut. On Friday, there was the news the UK’s credit rating has been downgraded by a second agency, mirroring concerns about the economy from the IMF. 

So, in today’s report I’m going to have a look at what the downgrades mean for the Pound, and what this week may have in store for Sterling exchange rates. 

Fitch downgrades UK credit rating to AA+ 

The Fitch credit ratings agency has downgraded the UK to AA+ owing to a weakened economic outlook. Fitch said its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned its outlook to "stable", removing the threat of further rate action in the near term. 

It’s the second agency to downgrade the UK, after Moody's became the first major agency to downgrade the UK's sovereign debt rating earlier this year, although Standard & Poor's reaffirmed its AAA rating earlier this month. 

Regarding the latest downgrade from Fitch, the Treasury said: "This is a stark reminder that the UK cannot simply run away from its problems, or refuse to deal with a legacy of debt built up over a decade. “Fitch themselves say the government's 'continued policy commitment to reducing the underlying budget deficit' is one of the main reasons UK debt now has a 'stable' outlook. 

When markets opened this morning, there was an initial drop for Sterling, before recovering all its losses and the mid-market rate sits at 1.1700 at the time of writing. The reason the downgrade hasn’t had much effect on rates is because it was largely expected at some point anyway, and also the fact they still have the UK with a ‘stable’ outlook. In addition, all eyes are on this week’s GDP figures due to be released Thursday. More on that shortly. 

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Christine Lagarde and New BoE Chief warn over UK growth 

Compounding the poor outlook many have of the UK’s economy at the moment, the head of the International Monetary Fund (IMF), Christine Lagarde expressed renewed concern over the health of the UK economy last week. The UK's growth numbers are "not particularly good", Ms Lagarde said. 

Her comments came as Mark Carney, the next governor of the Bank of England, hinted at his concerns over the UK. In an interview ahead of the meeting between the IMF and the World Bank, he said the US recovery was leaving behind "crisis economies" that included the UK, the Eurozone, and Japan. 

Mr Carney has been reluctant to comment directly on the UK ahead of taking the helm of its central bank in July. But he appeared to back Chancellor George Osborne's view that austerity measures were important to promoting growth. 

So what does all this mean? 

In terms of the currency markets, there has been little impact. You can read a very good outline of why there wasn’t much movement on the markets here on the BBC site in a great article by Stephanie Flanders

In a nutshell, the IMF’s comments are more to do with politics than economics, and so exchange rates have not really been affected. 

What may happen to exchange rates this week? 

There are various data releases, but by far the most important is the UK’s latest GDP release at 09:30am Thursday morning. This will finally confirm whether or not the UK is in recession. 

If confirmed, expect the Pound to drop. If the number shows growth, expect Sterling to make some gains. Either way I expect rates to move one way or the other on Thursday. 

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So when should you buy or sell your currency?

If you are buying or selling currency, the rate could therefore move in your favour or against you, and as the GDP prediction is so finely balanced.

Therefore you have 3 options: 

• Fix an exchange rate before the decision, and protect yourself against it moving the wrong way. 
• Take a gamble and wait until after the decision, and hope things move in your favour. 
• Hedge your bets and book half your currency before, and gamble on the rest. 

Regardless which currency you need to buy or sell, take advantage of my expert knowledge of the currency markets and send me a free enquiry today. I can discuss your requirements, run over your options, and help you make an informed decision on when to fix your rate. When you decide to do so, the rates I can source are commercial and up to 5% better than you can get at banks or other financial institutions. 

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Exchange rates fall after BoE Inflation report

Wednesday 13th February 2013 

Good afternoon. In my last post I outlined the fact that Sterling had made a recovery against the Euro. However I’m afraid the recovery was short lived, and the Pound has continued to lose value and rates have fallen. In today’s post I’m going to explain why this has happened, and look at the Pound/Euro trend for the coming months. 

So let's get straight on to why rates have fallen again...

Bank of England weakens the Pound pushing exchange rates lower. 

This morning at 10:30am, the Bank of England (BoE) released it’s latest inflation report, delivered by outgoing governor Mervyn King. A link to the full report is here. This afternoon I will simply run over the effects on exchange rates rather than analyse the full report in detail. 

Recent figures have shown that the economy shrank by 0.3% in the last three months of 2012, fuelling fears that the UK could re-enter recession, defined as two consecutive quarters of contraction. In todays report, Sir Mervyn said: ‘The UK economy is set for a recovery. That is not to say that the road ahead will be smooth. This hasn't been a normal recession and it won't be a normal recovery.’ 

A more recent GDP estimate indicates that there may not be a contraction in the first 3 months of this year. Indeed, the BoE does not expect a triple-dip recession but said GDP was likely to continue at below pre-financial crisis levels for around another two years. 

"Growth is likely to be weak in the near term but further out a continued easing in domestic credit conditions, supported by the Bank's asset purchase programme and the Funding for Lending Scheme, together with the stronger global backdrop, underpin a slow but steady recovery in output," the governor said. 

So why did his comments weaken the Pound? 

The key to why the Pound fell is that the markets see his comments as Sterling negative. Sir Mervyn King said “there are limits to what can be achieved via general monetary stimulus” as he urged the Government to “find ways of boosting overseas demand for our products” and push through “supply reforms” – often associated with tax cuts and deregulation. 

Reading between the lines, what he means by this is we need a weaker Pound in order to make our exports more attractive. There is now the increased chance of further Quantitative Easing. The BoE actually want the Pound to weaken further and their policy moving forwards will likely reflect this. That is the reason the Pound fell so sharply when the report was delivered. 

Also of concern is the fact that the Bank’s update on the state of the economy came as the head of the Government’s Debt Management Office claimed that markets expect the UK to lose its prized AAA sovereign credit rating – this is also weighing on the Pound and knocking exchange rates lower. 

 Sir Mervyn was delivering his penultimate Inflation Report. His last Report will be in May, before he is replaced by Mark Carney as governor in the summer. It will be interesting to see if Mr Carney also pursues the policy of trying to weaken the Pound to encourage an export led recovery. We shall see. There are some interesting charts on the telegraph website which you may find of interest here. 

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So will the Pound keep dropping or recover? 

Nobody can predict which way the markets will move. My personal view is that we could well see more weakness, especially if we do lose our AAA credit rating and/or see more Quantitative Easing from the BoE. So for those needing to buy Euros, you should consider your options now to protect against adverse exchange rate movements. 

Rates for those converting back to Sterling are close to an 18 month high, so if I needed to convert Euros back to Sterling I would be keen to take advantage of the rate while it is favourable. 

In the EU, there is talk of the European Central Bank also trying to weaken the Euro in the same way as our central bank is weakening the Pound. This could cause rates to climb back but there is no way of knowing if this will happen. We are entering the dangerous arena now of a currency war, where central banks race to try and devalue their currencies to make investment into their country more attractive. This makes predicting where exchange rates may move impossible and also makes swings in the rate extremely volatile, such as we have seen over the last few weeks. 

As you can read here, G7 nations have recently agreed not to engage in so called currency wars, however what is said and what actually happens are often very different things.

What to do if you need the best exchange rates. 

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