Pound falls after growth forecasts revised

Wednesday 19th May 2013 
Good afternoon, and I hope everyone enjoyed the extended bank holiday break. The markets re-opened yesterday but it was pretty flat. Today has been busier and we have seen the Pound/Euro rate drop today after a cut to UK growth forecasts. In today’s post I will take a look at this, and also the increasing threat of more Quantitative Easing in the UK that could weaken the Pound further. 

In today’s report: 

•  OECD cuts UK economic growth forecasts
• Poor UK data increases chance of more QE 
• Central banks in currency war to devalue currencies 
• How to protect against adverse rate movements 

OECD cuts UK economic growth forecasts 

Today we have seen Sterling drop sharply against the Euro, after a leading economic think tank has forecast that Britain's economy will grow at a much slower pace than expected. The reasons were given as spending cuts and a lack of consumer and business confidence restrict the recovery. 

In its 6 monthly forecast, the Organisation for Economic Co-operation and Development (OECD) warned that a long and bumpy recovery in the Eurozone would continue to hit exports. They have also said the the UK governments deficit reduction programme would act as a brake on growth. 

The OECD said the UK government's austerity plans had affected growth, but said the measures were "necessary" and warned that "further fiscal consolidation" was needed. I read this as further confirmation that the Bank of England will have to pursue more Quantitative Easing. 

I’ll get into more detail regarding this in a moment, but in a nutshell further QE would weaken the Pound and bring rates further down. 

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Poor UK data also increases chance of more QE; Pound/Euro on the way down? 

Last week we had some quite poor UK data, including Retail Sales that were much lower than expected, and inflation numbers that also disappointed. There is now growing expectation that when the new Bank of England Governor takes over in a month, he will be more aggressive in pursuing the asset purchasing programme. 

The more and more likely this is, the more the Pound will come under pressure so we could see rates continue to fall away throughout June. Of course it’s not a given that GBP/EUR rates will drop, as the currency pair is being pulled in both directions. 

On the one hand, the threat of QE and poor data is weakening the Pound. On the other hand, the Euro is also relatively weak due to it’s own sluggish growth, so the direction of GBP/EUR will probably come down to investor sentiment, and so could go either way. 

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Pound/US Dollar could fall in coming weeks

The muted and slow recovery in Britain contrasted with the forecast for the US, which is expected to reach almost 3% growth next year. This coupled with the fact the US Dollar is a safe haven currency will probably mean GBP/USD rates fall in the coming weeks. 

Good news from the states will strengthen the US Dollar, making it more expensive to buy. Don’t be surprised to see rates drop back below the $1.50 mark. 

Currency Wars 

As I mentioned above, the Bank of England may well pursue further Quantitative Easing. But they’re not the only ones doing this. The USA and Japan also have asset purchasing programmes. What they are actually doing, is attempting to manipulate the value of their respective currencies. 

Why? Well taking the UK as an example, the problems in the Eurozone are affecting our exports (50% of our exports go to the EU). So, buy flooding the market with Sterling through QE, they are diluting the pool and thus lowering the value of the Pound. In turn, this makes our products more attractive to buyers in the Eurozone, and so the idea is to help boost these exports in order to return the UK to steady growth. 

The truth is that it’s really an unproven tool . You can read an interesting article on the subject by the BBC economics editor Stephanie Flanders here

How to protect against adverse exchange rate movements 

The uncertainty and differing forecast for exchange rates over the coming weeks and months, means it is impossible to predict where exchange rates are headed. For those that need to buy or sell currency, this should be a worry, as when moving large sums, the difference can be huge. For example earlier this year, the cost of buying €150,000.00 increased by over £10,000 in just a few months. 

So, to protect against an unnecessary increase in the cost of the currency you need to buy, a popular solution is a ‘Forward Contract’. This allows you to fix today’s exchange rates for up to 2 years in to the future, and only lodge 10% of the total you want to convert. Then at any time in the next 2 years, you can settle the remaining funds on the contract, in part of in full, and take delivery of your currency. 

In this way you can give yourself a finite cost, protect against rates moving against you, and remove all your exposure to the volatile currency markets. 

To discuss this, and the other tools I can offer, click below to send me a free enquiry. In addition to various contracts and expert knowledge on the currency markets, I can offer you commercial rates of exchange that are up to 5% better than you can achieve at the banks. 

I look forward to hearing from you. 

Click here to send me a free no obligation enquiry. 

Pound at 4 month high vs US Dollar, flat vs Euro

Wednesday 28th March 2012
Good morning. The Pound/Euro rate has been pretty flat so far this week, remaining around the €1.19 to €1.20 range. Against the US Dollar rates briefly hit a 4 month high above $1.60, before retreating slightly. Today we will take a look at what is causing recent movements, and the forecast for GBP/EUR and GBP/USD for the coming weeks.

Sterling remains range-bound vs Euro

Let's start with the Pound/Euro exchange rate, which remains around the €1.20 level. It did briefly drop by half a point yesterday morning when the first round of economic figures were released, however the drop was not to last.

At 12:00pm yesterday the CBI Distributive Trades Survey was released by the Confederation of British Industry. This is an indicator of short-term trends in the UK retail and wholesale distribution sector, and tends to have an impact on the formulation of economic policy at the Bank of England and within Government, and so can often impact Sterling.

The figures were much better than analysts had forecasts, and the Pound steadily recovered throughout the day, pushing back towards the €1.20 level.

What is the Pound Euro Forecast for where rates may head?

We're getting mixed messages from analysts at the moment. On the one hand the EU debt crisis is not resolved and this is keeping the Euro weak. It's important to remember however that there is no fundamental strength in the Pound, it's simply the fact that we have our own central bank to print money, and a well established austerity plan that the markets like. This is keeping the Pound supported against other currencies... for the moment.

Supporting this view was Bank of England policymaker David Miles, who said earlier this week that economy had effectively stalled, with growth rates near zero over the last six months, keeping alive slim chances of another round of quantitative easing. A bulletin released by the BoE yesterday suggested that asset purchases by central banks have helped economies weather their crises, and so the sluggish UK growth is keeping alive the prospects of more QE.

My view is that while the threat of more QE is on the horizon, the Pound will not make any significant gains against the Euro. It will likely remain range-bound between €1.18 and €1.20, but any resolution to the EU debt crisis could pull rates back down. In fact for several years now, we have seen rates above €1.20 only to sharply drop back away within a month or two. If you need Euros at the best possible rates, then send me an enquiry now to find out how you can protect yourself against the rate dropping.

EU Debt crisis: OECD urges eurozone rescue fund boost

The OECD has said that the eurozone needs to double its bailout fund to €1 trillion, however German Chancellor Angela Merkel said she would favour only a temporary increase. The reason for the proposed increase is that some fear that the fund will not be able to cope with another bailout.

At the moment we've seen bailouts already for Greece, Ireland and Portugal. While this has given some stability to the markets and kept exchange rates stable, the chance is still there that other countries, namely Spain and Italy, could require some funding. This shows that the EU debt crisis is far from over, and is keeping rates supported around the €1.20 level.

Adding to the problems in the EU, Spain confirmed yesterday that they had fallen back into recession. It contracted again in Q1 this year, and in the last quarter of last year. 2 consecutive quarters of negative growth is a 'technical' recession.

Sterling hits 4 month high against US Dollar

Despite the stability in GBP/EUR rates, the Pound/Dollar rate actually gained quite well yesterday, and rose to its highest in more than 4 months. The dollar was hit by increasing chances of more U.S. monetary easing, which weakened it and made it cheaper to purchase.

Given rates are now quite favourable, those that need the best exchange rates for Dollars can look at a Forward contract - lock in the rate now for up to 2 years, and only lodge 10% of the funds now, the remainder due when you want the currency. If this is of interest to you contact us to discuss it further.

Today's Data to watch out for

We start in Germany again today, with inflation numbers at 7am. A few hours later the EU releases money supply data. US figures this afternoon include Durable Goods orders. There are no releases of note today from the UK.

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