Pound/Euro gains before dropping back to €1.26 again

Thursday 4th December 2014
It's been a busy week, but all in all we're back to where we started with GBP/EUR rates, now sitting around the €1.26 level again. Let's take a look at what's been happening. 

Autumn Statement causes Sterling to rise

Wednesday was a good day for the Pound, starting with better than expected services PMI that gave the Pound a boost. This was compounded by the budget statement, which the markets took very positively for the Pound and GBP/EUR rose by over 1% on the day, getting to 1.2766 at the peak. However as is often the case, spikes to the upside can be very short lived and this proved to be the case again during trading today, when the ECB's draghi made comments that pulled the rate back towards the €1.26 level. 

What caused the GBP/EUR rate to fall? 

It was largely comments by the European Central Bank (ECB) president Mario Draghi. As always for the 1st Thursday in the month, the UK and EU central banks announced their decision on interest rates, with both opting to keep rates on hold at record lows. This was expected, and soon afterwards the ECB president gave a press conference. 

You can read his full comments here. He basically hinted that QE is coming for the Eurozone, but the market was expecting a little more clarity. So if it sounds as though they are edging towards quantitative easing, why didn’t the Euro weaken and cause GBP/EUR to go up further? 

Firstly it's worth remembering that the ECB has already started something that has a lot in common with QE. It is buying financial assets based on private sector loans with newly created money. The difference between this and the US and UK QE programmes is that firstly it’s much, much smaller. Secondly the assets being purchased don’t actually include government debt. 

The markets were actually expecting him to be a little clearer on exactly when and how their QE programme would be expanded. What he actually said is that there had been "a very rich, ample discussion" on what unconventional instruments the bank had available to it within its mandate, adding that “We discussed broadly all sorts of measures, we... discussed various options of QE. And more work is needed and... we'll keep you informed." 

In the absence of any clear indication of further stimulus that had been expected, the recent weakening of the Euro had been reversed, and it is this that caused the single currency to strengthen and pull rates back towards the €1.26 level where it has felt comfortable at in recent weeks. 

Tomorrow's data

GBP/EUR – we have Inflation Expectation measures for the UK, which could affect the consensus of when interest rates will rise, and so could affect the Pound. Over in Europe we have the latest GDP measures which if better than the expected 0.2% could cause GBP/EUR to fall. 

GBP/USD – there are lots of released from the USA later this afternoon including factory orders, Jobless Claims, and NonFarm Payrolls. The consensus is for 232,000 jobs to have been created in the USA last month, however as the prediction is usually quite far off the actual number, anything higher than this would cause GBP/USD to fall, and vice versa. 

If you need the best exchange rates, contact me by clicking here for a free consultation on the currency markets and to discuss the tools available to help you achieve the best possible exchange rates. 

Have a great weekend.

How will the Autumn Budget Statement affect exchange rates?

Tuesday 2nd December 2014
There are 4 things that generally affect exchange rates like Sterling/Euro, Sterling/Dollar etc. These are: Economic figures such as unemployment numbers, interest rates, Retail sales etc. Then we have natural disasters such as floods, famine and droughts that can affect the economic output of a country and in turn the value of its currency. Thirdly acts of war have an effect as it can drive investment in or out of a country. Lastly there are political events that can affect an economy. A good example of this would be this years Scottish referendum, that caused large fluctuations in the exchange rate. Political instability is the theme of today's post...

UK Autumn Budget Statement 

At 12.30pm tomorrow afternoon (Wed 3rd December 2014) the chancellor George Osborne will deliver his Autumn budget statement, and this has the potential to affect the currency markets and the value of the Pound. In turn, we could see volatility in exchange rates should there be any surprises. 

I expect him to outline the various ways in which his economic plan has been working. The rapid growth rate is certain to feature, and he will be keen to highlight the UK's performance over the past 18 months compared with our neighbours in the Eurozone. He is also likely to talk about borrowing, taxes, spending and growth. 

In years gone by the statement has had little to real effect on the currency markets. This is because for the most part it is simply political theatre, more so tomorrow with a general election just around the corner. This year however could be different... 

Could the Pound fall following the statement? 

Regular readers will know that the Pound rose well through most of 2014, gaining strength on the expectation that interest rates would rise. (Higher interest rates strengthen a currency due to the higher return on offer for investors). In recent months however the Pound has fallen back slightly, due to inflation numbers dictating interest rates will likely remain at record lows well into 2015. 

Another thing that has kept the Pound in check recently is the threat of deflation in the Eurozone. The EU is our largest trading partner, and any slowdown there would also dent the UK economy. Indeed, it’s not in the UK’s interest for the Pound to get too strong, as our exports become more expensive for EU buyers. 

If Mr. Osborne gives any surprise revisions to UK growth in tomorrow’s statement it could well weaken the Pound and cause exchange rates to fall. He could also use the opportunity to purposefully devalue the Pound, by highlighting the risks of an EU slowdown affecting the UK economy. We could of course see no effect of the statement at all, however there is more potential than normal for his word to affect the Pound. 

What else could move rates this week? 

After tomorrow, all eyes will turn to Thursday when the UK and EU central banks are both expected to keep interest rates on hold, however statements accompanying the decisions could hint at further stimulus, so I expect a choppy day for Pound/Euro. Mario Draghi, the ECB president could hint at easing which could weaken the Euro. Mark Carney, the UK governor, has been very inconsistent in his views on interest rates, so there is some potential for Thursday to shake up exchange rates.

Are you looking for the best exchange rates? 

Click here to send me a free no obligation enquiry to see what rates I can offer for your currency transaction. Even if you already use a currency broker, comparing rates can often save you a significant sum when converting large amounts. In addition to excellent rates of exchange, I offer free consultations to anyone that needs to convert currency, to explain the options and contract types available and explain what is moving exchange rates. 

Click here to send me an enquiry now.