Unemployment falls, Pound rises...

Wednesday 18th December 2013 
In my last post I outlined the data this week that I thought would have an impact on exchange rates. I pointed out that today (Wednesday) would likely cause changes in currency rates due to some key data including Unemployment and the latest Bank of England (BoE) minutes. Unemployment was lower than expected pushing the Pound higher, but comments from the Bank of England threaten to put the brakes on the Pounds rise. In today’s post I’m going to take a detailed look at what has happened, and what it means for the exchange rate forecast.  

UK unemployment falls, Sterling rises. 

The UK unemployment rate has fallen to its lowest level since 2009, official figures from the Office for National Statistics (ONS) showed this morning. The market expected a figure of 7.6%, however the actual number came in at 7.4%; the lowest rate since February 2009. As a result, the Pound has risen against the Euro by 1 cent to €1.1915, and also by a cent against the US Dollar to $1.64. 

As the chart above shows, the news gave Sterling a boost and caused exchange rates to rise, as I predicted would be the case on Monday. So why exactly did the Pound gain? 

This 7.4% rate compares with a figure of 7.6% for the three months to September, and is below the rate analysts had expected. The Bank of England has said it will not consider raising interest rates from their record low of 0.5% until the unemployment rate falls to 7%, so the fact that we are getting closer to the 7% target means interest rates in the UK could rise sooner than expected. 

Higher rates of interest attract investment due to the higher return, and this means demand for Sterling causing it to rise in value, and in turn push exchange rates up. However, the BoE governor Mark Carney has said an interest rate increase is not guaranteed even when unemployment falls to this level. Indeed as we will see in a moment, the BoE could even move to weaken the Pound in the coming months.

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BoE say that Sterling strength not good for the UK 

So the Pound is strong, exchange rates are rising, the economy is growing, so all is well right? Not necessarily. Sterling's recent strength risks derailing Britain's recovery and could jeopardise attempts to rebalance the economy, the Bank of England said this morning. 

The nine members of the Monetary Policy Committee (MPC) said while sterling's gains over the last 4 weeks reflected a stronger economic outlook, further rises could harm export growth. You can read the full minutes yourself by clicking here. 

Half our exports go to the Eurozone and so if the Pound gets much stronger, our goods become more expensive and so our recovery could start to falter. 

"Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery," minutes from the Bank's December meeting showed.  

Sterling is at a five year high on a trade-weighted basis, where it is measured against a basket of other currencies, and the Bank said that for Britain's "burgeoning" economic recovery to be sustainable, it needs to rely more on business investment and exports and less on consumer demand. 

So you have been warned; this is the clearest signal I have seen yet that the BoE may move to devalue Sterling as they did in the summer of 2012 when rates fell from €1.30 to €1.14.

Will the Pound go up or down against the Euro?

Summary - when should you fix your rate?

On the one hand the UK economy is good, the Pound is gaining value, and this could continue should economic numbers continue to impress. This would be good news for those that need to buy Euros, but not so good for those looking to convert back into Sterling. 

On the other hand, if the Pound gets much stronger, might we see the Bank of England move to devalue the Pound due to the reasons I have outlined above? This would lower exchange rates, meaning it could be wise to fix a rate soon while it’s on a high. 

There is no way to predict what will happen, but if you need to make the most of your exchange, having a good currency broker on your side can make a huge difference. In addition to helping you achieve rates up to 5% better than banks can offer, I can explain various options and contract types that I have available, that can protect you against rates moving against you, while still allowing you to take advantage if the market moves in your favour. 

The first step is to send me a free enquiry by clicking below. I can then have a brief discussion regarding your requirements, explain the options you have, and enable you to make an informed decision on when to fix your rate of exchange. 

Click here to send me a free enquiry now. 

I look forward to hearing from you. 

Alastair Archbold

Effect of US Debt Ceiling on Exchange Rates

Thursday 17th October 2013
Good afternoon. Markets have reacted to the news that the US has averted hitting it’s debt ceiling, so today’s post is a quick analysis on the effect it has had on exchange rates.

Let’s start at the beginning; what is this debt ceiling that’s been in the news?
 
The US government is forbidden from borrowing more than $16.7 trillion by law, under legislation that dates its way back to World War I. The first debt ceiling was set at just $5bn, but as America has continued to spend more than it earns, it has repeatedly had to raise the debt ceiling nearly 100 times since then. 

The last time it was set was in May, following a suspension of the ceiling during the first few months of 2013. If it had been hit, the government would have to pay $6bn in debt repayments.

Defaulting on debt would be catastrophic, since trillions of dollars in capital flows are backed up by US bonds - a traditional safe haven. This could result in a credit crisis equal or worse to that seen during the financial crisis, so is obviously a nightmare scenario.

Before the agreement, how had it affected exchange rates?

Normal logic dictates that problems for the US would have caused the US Dollar to weaken. However, due to the fact that it’s a safe haven currency, it actually had the opposite effect. 

Due to the uncertainty it generated in global markets, it actually strengthened the Dollar as investors sought the safety of the Dollar, and this caused Pound/Dollar rates to drop, and also Pound/Euro rates as investors sold the Pound and bought the Dollar.

So what has been agreed?
 
The 2 week political crisis came to an end last night as Congress voted through an eleventh-hour deal to re-open the government and avert a devastating debt default.  After 16 days of government shutdown and only 24 hours before the deadline to raise the debt ceiling, both the Senate and House of Representatives voted through a compromise bill.

The shutdown is estimated to have taken a $24 billion (£15 billion) toll on the US economy while the Fitch rating agency to put America on "rating watch negative" ahead of a possible downgrade.

And what has the effect been on exchange rates now the US won’t default?

Once the agreement had been announced, those that had put funds into the US Dollar pulled back out into other currencies. This has caused the Pound/Euro rate and Pound/Dollar rate to rise, as you can see from the charts below.

I hope this has been useful in explaining how these recent events have affected exchange rates.

Do you need to get the best exchange rates? 

I write this blog to keep my existing clients and potential clients up to speed with what is happening to exchange rates. I am a Senior Currency Broker for one of the UK’s leading foreign exchange companies, and I can help you source the very best rates of exchange.

Whether you need to convert Sterling to another currency, or convert I foreign currency back to Pounds, I can help you. My rates are up to 5% better than banks can offer. 

So click here to make a free enquiry with me now to see how much you can save.
 
I look forward to hearing from you.

Alastair Archbold