Following the terrible attacks in Paris last Friday, the financial markets initially saw a flight to safety, with the Euro weakening as investors moved funds to other assets such as the US Dollar. Despite a little bit of risk aversion, the fact there was a whole weekend to digest events before markets opened on Monday meant that the reaction was more muted than would have been the case had the terrorists attacked on a weekday. Analysts see limited economic impact from the attacks other than tourism, and focus has returned to Central Bank Policy, which I’ll touch on in more detail in a moment.
First, let’s look at the fact that there has been a huge increase in the Sterling/Euro rate over the last month, rising from €1.34 to €1.4250. In real terms this means that a typical purchase of €300,000.00 has differed in cost by a staggering £13,000.00 which really illustrates how quickly things can change, and the impact this can have on budgeting for a property purchase overseas. The chart below shows the gain since my last update:
What has caused the GBP/EUR rate to gain so much?
In my last update, I explained that the reasons for the rate dropping to around the €1.35 mark was the fact the European Central Bank (ECB) had indicated that there was likely to be no change in interest rates, and no extension to their stimulus programme.
All this has now changed however, and recently the ECB president has indicated that not only will they consider increasing and diversifying their stimulus programme, they may also cut interest rates into negative territory. This is due to low economic growth, non-existent inflation, and unemployment rates stuck near 11%, and makes monetary policy easing in December look like a done deal.
The effect on currencies is that the Euro has weakened and become much cheaper to buy, pushing GBP/EUR rates close to the best they have been in 8 years. It should be noted however that the last time that rates were this high, within 2 months the pair had dropped by 7%.
Sterling/Dollar could fall due to contrasting central bank policy
The ECB and the Federal Reserve (FED) are the two largest central banks in the world, however they are moving in opposite directions. In contrast to Europe, the USA is posting strong jobs figures and are now very likely to start raising interest rates in December. This is likely to strengthen the US Dollar and make it more expensive to buy, and for this reason we may see GBP/USD rates dip below the $1.50 mark as 2016 approaches.
Discuss your currency requirements with Foremost Currency Group today
If you need to buy or sell any international currency, then get in touch with your personal broker today to discuss your options. Taking a pro-active approach to your currency requirements could be a prudent move, so get in touch today to find out the various ways we can help protect you against adverse exchange rate movements.
Notes to editors:
Alastair Archbold is an FX manager on the dealing floor, having been with the Foremost Currency Group for over 6 years. With over 16 years’ experience in the Financial Services sector, he has a wealth of knowledge for any clients entering the often daunting world of the currency markets. In addition to providing clients with incredible exchange rates, he has also written countless FX articles for various national newspapers and international publications.
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