Pound/Euro forecast: recovers on Greek worries

24th May 2012
Good morning. It’s been yet another volatile week for Sterling/Euro exchange rates. Early in the week the Pound weakened off, falling into the €1.23’s. This was due to concerns by both the Bank of England and IMF on growth, increasing the chance of further Quantitative Easing. The fall in rates was halted yesterday however, when the Euro weakened again significantly over Greek Euro exit fears, pushing rates back close to €1.25.

In today’s post I’ll look at these events in detail and analyse what may cause Pound Euro rates will go up or down in the coming months.

Pound/Euro rates gain on Greek concerns

GBP/EUR rates surged yesterday after a report saying that the Greek government may be making preparations for leaving the euro. Also weakening the single currency was Germany’s central bank saying that the developments in Greece were "highly alarming".

"Greece is threatening not to implement the agreed reforms and consolidation measures," the Bundesbank said in its latest monthly report. It said that scenario could create substantial challenges for the Eurozone.

Many analysts think that Greece may abandon the austerity measures and be forced out of the euro. Ms Lagarde from the IMF said that they did not like that prospect, but that it was "prepared for all possible situations". But she said that the costs of Greece leaving could be so high that other members of the Eurozone might be prepared to pay more to keep Greece in the euro.

The continued worries have pushed rates back up as the chart demonstrates.

Bank of England: More QE on the cards?

Yesterday we saw the latest Bank of England (BoE) minutes on their recent decision to hold off further Quantitative Easing. Policymakers voted by 8-1 this month against pumping more money into the economy, but the decision was "finely balanced" for some members.

One interesting thing the minutes showed was that the crisis in the Eurozone could hit the UK's economy, which would make the case for extra stimulus more compelling. This is what will likely stop GBP/EUR rates continuing to surge towards €1.30, as any further QE will likely weaken the Pound significantly.

IMF also pushing for more QE

On Tuesday, the International Monetary Fund (IMF) said the UK's continuing economic weakness meant authorities should consider more QE and even cutting interest rates. The IMF said the BoE should “reassess the efficacy” of cutting rates below 0.5 per cent and called for “further monetary easing”, adding that while monetary stimulus has helped, the economy remained flat.

This again shows that while the EU problems are weakening the Euro, they may also start weakening the Pound which may actually cause rates to fall back away.

The case for Pound Euro rates going up

Looking at the Euro on its own, there is a logical case for rates rising further. The Euro will likely continue to weaken; it’s highly unlikely the Greek problems will be solved any time soon. This continued weakness will likely mean a cheaper single currency which means exchange rates would rise. However we’re not just looking at the Euro on its own, we have to factor in the value of Sterling…..

The case for Pound Euro rates going down

While the EU problems continue, the Bank of England and IMF have warned that it will soon start to affect the UK. 50% of our exports go to the EU, so a strong pound is not attractive to the BoE. For this reason, further EU problems will affect the UK economy, and with more QE now looking very likely, the Pound will weaken off and exchange rates could fall.

How to get the best exchange rates in a volatile market

As outlined above, future rate movements are highly uncertain and there are logical arguments to show both gains and falls in the rate in the coming months. Of course it can’t do both things, so for clients looking to buy or sell Euros, some could lose out significantly if rates move drastically one way.

The best option is to send us an enquiry and have a free consultation on the current market conditions, and to find out what options you have to protect against the market moving the wrong way. When converting a large sum, exchange rate movements can have a huge impact on the cost.

In knowing what options are available to you, and armed with sound market knowledge, you can make an informed decision on what action to take to help you make the most of the market. Don’t just follow the rates hoping it will move in your direction. Contact us now and take control of your currency requirement, rather than letting it control you.

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Pound/Euro drops after dire BoE report - forecast

Thursday 17th May 2012
Good morning. The volatility continues in the currency markets, with the EU debt crisis and Greece’s problems continuing to drive exchange rates. Earlier in the week we hit new highs of €1.2580 against the Euro, however as is often the case, the gains were short lived. Sterling has now started to weaken following grim growth forecasts by the Bank of England. So in today’s posts we’ll look in detail at:

• The EU debt crisis situation; what will happen next?
  
• What would happen if Greece leaves the Euro?
• Forecasts for Pound/Euro going up in 2012
  
• Forecasts for Pound/Euro going down in 2012

I’ll then analyse the UK’s economic prospects and look at the arguments for where Sterling/Euro rates could move throughout the remainder of 2012. Let's start with the obvious - the situation in Greece....

Greek worries weaken the Euro pushing GBP/EUR rates higher.

The failure of Greece to form a government has plunged its membership of the Euro into doubt this week, and is the reason the Euro has weakened so much. Indeed earlier in the week we saw rates get very close to €1.26.

It now looks like Greece will hold fresh elections in June after final talks to form a coalition failed on Tuesday, and this raised new concerns over Greece's continued membership of the Euro. The uncertainty pushed the GBP/EUR rates up at the start of the week, peaking at a new 3.5 year high of €1.2577.

EU officials fear Greece will elect an anti-bailout government, which could trigger a Greek exit from the euro. That possibility is now discussed openly among Europe's leaders

So what would happen if Greece leaves the Euro?

For a few years now, everyone has been asking what would happen if Greece left the euro and reverted to the Drachma. It’s not something that would happen overnight, however it is looking increasingly likely. The more uncertainty we see in the euro zone, the more the euro could weaken.

While the question of Greece leaving is real one, the fact remains that there is no mechanism to do so. The possibility was never envisaged when it was created in 1999; to exit the euro it would have to leave the EU. There would probably be an interim period after which any Euros would be converted to Drachma at a pre-agreed rate, much like when countries switch to the Euro. Supply and demand would then dictate the new currencies value. The likely result is the new currency would fall through the floor and inflation would spiral.

So the best case scenario of Greece leaving would leave Greece with no buying power and high inflation. However, with its currency so weak the idea is that the economy would then grow.

Of course at the moment all of this is speculation, and given there is no mechanism for them to leave, even if they decided to do so tomorrow it would take many months before any potential return to another currency would be implemented. So let’s first look at the UK economy and where Sterling could move, and then at the more immediate effects we may see on exchange rates.

Sterling weakens on Bank of England forecasts

Yesterday Mervyn King, governor of the Bank of England said it has cut its growth forecast for this year to 0.8% from 1.2%, saying the Eurozone "storm" is still the main threat to UK recovery. The news shifted focus back towards the UK, and the Pound dropped across the board, bringing rates back down from their recent highs. Indeed I have warned in recent days that the UK is not immune to the EU’s problems, and the markets are now pricing this into the Pounds value.

The Eurozone was "tearing itself apart" and the UK would not be "unscathed", said Bank governor Sir Mervyn King. He told a news conference that the euro area posed the greatest threat to the UK recovery, and there was a "risk of a storm heading our way from the continent".

"We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

On quantitative easing, he said that no decisions had been made whether or not to continue pumping money into the economy. The last stimulus programme was still "working its way through the system.

So will Pound/Euro rates go up or down this year? 2012 forecast

This is what everybody wants to know, but what nobody can predict! Indeed forecasts are differing between some big players. Deutsche Bank have revised their forecasts to rates dropping to €1.16 by the end of the year, citing the fact that the UK economy will be affected byt he EU problems, and further QE is likely which will weaken the Pound. Deutsche Bank trade more currency than anyone else in the world so you should certainly take notice if you need to buy Euros.

In stark contrast however, Barclay’s Capital are forecasting €1.30 by year end due to the EU’s debt crisis. This really shows how uncertain things are going to be this year, but also highlights the huge difference that these levels would make to you if you need to make a large transfer.

Taking the Euro on its own, I would say that it will likely weaken more which should make it cheaper to buy, but what is hard to factor is the effect it will have on Sterling. Half our exports go to the EU so that could push the Pound down, and it wouldn’t surprise me to see Mervyn talk the Pound down some more to help the export led recovery, as he’s not keen on a strong Pound.

So there are logical arguments that point to both rates continuing to rise, and also for rates to drop back below the €1.20 level, and this really illustrates the uncertainty over which way rates will go.

If you need to get the best exchange rates, know your options.

If you have a requirement to convert currency and want the best Pound/Euro exchange rates, what is imperative is you know the options available to you, and have protection against rates moving the wrong way. Simply leaving it to chance could prove very expensive indeed should the market move against you.

If you need to buy or sell Euros in the next 12 months, send me a free enquiry now. I can provide a free consultation on the various forecasts, and the different options you have to help you achieve the best exchange rate. You can then make an informed decision on what action to take.

Click below to make a free enquiry today to find out what you can do to ensure you don’t get caught out by what is a very volatile currency market.

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