Sterling – Euro exchange rates plummet, where next for the Pound?
Recently the Pound has been suffering against most major currencies due to a number of reasons. Mainly the GDP figure for the Q4 of 2009 came in under expectations and despite showing we were out of recession finally, a 0.1% growth was not much to shout about. That started the tumble from a 5-month high we had reached versus the Euro and it’s been a downward spiral since.
Last week, retail sales for January were the worst since records began in 1993 and coupled with the public borrowing figure showing a massive deficit, where a surplus was widely expected due to the income of self assessment tax payments, was again a massive hindrance to the pound gaining back any of its losses.
With little exchange rate news out in the UK, and the Euro under pressure with the Greek economic situation we were hoping the pound might recover slightly and in the early part of the week it did just that. That was until Wednesday when Mervyn King , the Bank of England governor spoke to the treasury select committee and hinted that quantitative easing (the printing of money to buy government bonds) could still be used going forward and that economic recovery would be a slow process. Once again the pound lost value.
On Friday we had the second reading for Q4 of 2009 GDP. There was always the fear that this could be revised down thus showing we were not out of recession but fortunately this wasn’t the case. The figure came out a +0.3%. The increase was however overshadowed by the year on year figure which was downgraded, so yet again the pound has been weakening across the board – down a cent against the Euro and over a cent and a half against the dollar on Friday reaching fresh new 9 month lows!
What direction for the pound now?
The short term does not look good if most analysts are to be believed and to be fair the figures speak for themselves. We are in no doubt the UK is extremely fragile economically at the moment and with the prospect of an expansion to the Bank of England asset buying process on the cards, talk of a downgrading of our AAA credit rating status and with a general election on the horizon and polls showing a strong chance of a hung parliament, giving political uncertainty it is likely to be a rocky few months for the pound. This week we have various data releases but the main point for concern will be the Bank of England MPC meeting on Thursday when we will hear if they plan to continue the asset buying program this month.
How does this affect your currency purchase?
In real terms if you had bought €150,000 5 weeks ago it would be costing nearly £5000 less than it would right now, which is a huge increase to the cost of any overseas property for no reason other than exchange rate fluctuations which you have no control over. A solution to consider if you have any currency requirements coming up over the next couple of months is a Currency Index forward contract which allows you to fix the best Euro exchange rate available now by putting down a small deposit with the balance due at a set time in the future (or before this date if required early). This simply means you take all the risk out of the market and don’t have to worry about any further rate movements.
If you have a worst case scenario rate in mind that your budget wont stretch past then again it could be worth considering locking in as although you may gain a cent or two if the pound finds some strength from somewhere, you may also find yourself in the position where the property purchase is not possible anymore if the rates continue to fall.
