Foreign Exchange Manager Alastair Archbold looks back on a very poor start to the year for Sterling, and what the coming months may hold for our most commonly traded currency pair: Sterling/Euro.
It was only several months ago that the Sterling/Euro rate was at an 8 year high of €1.43, however the last few months have not been kind to the Pound and the current mid-market rate is around €1.29. This means the Pound/Euro rate is now sat at the lowest it’s been in well over a year, however has recovered slightly today.
GBP/EUR exchange rate
Why have exchange rates fallen so much?
There are several reasons for the decline in the value of Sterling. Firstly, the Global economy is slowing. China’s demand has dropped sharply, and oil and commodity prices are very low. This global slowdown has had a knock-on effect on the UK economy; inflation is near zero, with wage growth also very low. This means that the Bank of England (BoE) are now unlikely to raise interest rates for at least a year, possible longer.
Last year the expectation was that the BoE would have already started pushing interest rates up, and this is what helped the Pound reach highs of over €1.40 (a currency generally strengthens on the rumour of an interest rate hike, due to the higher return on offer for investors). With the base rate now likely to remain at its record low of 0.5% for a long time to come, Sterling is weakening.
What will affect the Pound in the coming months?
The other factor now coming in to play is the UK EU referendum, which is tipped to take place as soon as May or June this year. Cast your mind back to the Scottish referendum, or the general election last year, and you will remember that Sterling fell significantly in the weeks preceding the vote. This happened because the outcome was very uncertain, and the currency markets hate uncertainty. The latest ‘Brexit’ polls suggests this vote will also be very hard to call, and the effect an exit could have on the economy is totally unknown and could be huge. Goldman Sachs recently said in a note to clients that if Britain does vote to leave the EU, the Pound could weaken by 10% to 15%. While this is quite an alarming prediction, those that need to buy currency cannot ignore a potential return to exchange rates as low as €1.10.
The coming months are likely to be incredibly volatile for the currency markets, and any clients that need to buy or sell currency need to assess the options available. Our expert currency brokers here at Foremost Currency can discuss your requirements over the phone, explain the different options you can consider, and help you to make an informed choice on what action to take. While nobody can predict exchange rate movements, taking a pro-active approach to your currency requirements would be a prudent move in the current climate.
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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