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Sterling has remained relatively range-bound in recent weeks against our most commonly traded currencies the Euro and the US Dollar. Against the Euro it remains around the €1.19 mark where it has been for quite some time. This week however could provide new direction for the Pound, as the eagerly awaited interest rate and stimulus decision from the Bank of England is announced on Thursday.
GBP/EUR exchange rate graph
Pound brushing off lack of confidence, for now
In the last few weeks we’ve seen some relatively negative releases for the UK, however it hasn’t had much of an effect on exchange rates as none of it was much of a surprise, and is largely priced in to exchange rates already. The recent Purchasing Managers surveys showing confidence is at its lowest in more than 7 years didn’t dampen the Pound too much as it’s really not that much of a surprise. Last week we also saw consumer confidence suffer its largest drop in 26 years, showing increasing signs of economic pessimism. Despite this, Sterling has been surprisingly resilient and has not yet suffered the major falls that major banks were predicting after the initial sharp decline in the days following the EU referendum. “All the confidence surveys have been dire, but they’ve already been priced in. So we need something new now, and that is probably the Bank of England response,” said ING currency strategist Chris Turner.
How could Bank of England decision affect exchange rates?
This Thursday it’s widely expected the Bank of England will cut interest rates and/or increase stimulus to try and stave off the expected negative economic impact of the referendum. I think they will cut rates by 0.25% and increase QE by £50bn. However this is already priced in for the most part so they will have to do much more than that to damage Sterling much further. They could go large and surprise the markets with a 0.5% cut, but I think that’s unlikely. However the market hasn’t really looked much further than this week’s meeting, and with some BoE members talking about negative interest rates, further cuts could well be made in the coming months. If they hint at this in the press conference on Thursday afternoon, the market could start pricing this in meaning Sterling could fall much further.
Over in Europe, last week the ECB released the results of their bank stress tests. It’s the most important thing to happen in the EU for quite a while, and it’s been a few years since they last did this. RBS was highlighted as one of the banks that had poor results.
GBP/EUR rates aren’t that bad
When you take a step back and look at the bigger picture, the current GBP/EUR rates are not that bad at all. Many will remember back in 2009 when Sterling/Euro almost reached parity. The average rate for the last 8 years is around the €1.20 mark, which isn’t far from where it’s sitting now.
Anyone that needs to buy Euros should consider this, as I do think the Pound has much further to fall in light of the BoE potentially taking action this week, and the fact that soon we’ll start getting hard economic figures showing the real effect that the decision to leave the EU will have on the economy. In the long term, the UK economy should prove resilient and exchange rates are likely to recover. In the short to medium term however, expect things to get worse before they get better. Anyone that needs to convert Sterling to a foreign currency should get in touch today to discuss how we can help you get the best exchange rates and ensure you’re protected against a sharp decline in the value of Sterling. The levels now aren’t too bad, and in a months’ time with the benefit of hindsight, I expect that many Euro buyers will wish they had taken action to guard against the Pound weakening.
Those that need to convert other currencies, such as the Euro, to Sterling shouldn’t be complacent however. It’s important to remember there are many factors that affect exchange rates and the dire economic situation in Europe could start to become a focus for wearied investors looking to chew on something other than Brexit. EUR/GBP is currently at an extremely attractive level and are at the best they have been in a long time. A common mistake is always wanting that little bit more, and holding out for an inch can often mean losing a yard.
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