Problems for Sterling
Sterling nearly came to grief in November. It still might. As the Euro powered its way to one record high after another against the US Dollar, the Pound went out of its way to look for banana skins. And it found plenty.
At the beginning of November neither the Bank of England nor the European Central Bank (ECB) made any adjustment to its policy interest rate. The Bank Rate stuck at 5.75%; Frankfurt left its refinancing rate unchanged at 4%. But the outlooks for the two rates were quite different. A Sterling rate cut was - and is - in the air while the ECB hinted that higher rates may be made necessary by inflation.
Interest rate cuts possible
The idea of a base rate cut found growing popularity. Industrial and manufacturing production in the UK appeared to be slowing. The RICS announced falling house prices. The UK trade deficit grew to a record.
The wheels came off in spectacular fashion when the Bank published its Quarterly Inflation Report.
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Gloomy outlook for economy
Its downbeat economic tone was rubbed in by the Governor at his press conference and The Guardian's headline the following day summed it up as the "Bank's grim warning". Investors began to look for two quarter percentage point interest rate cuts and the Old Lady seemed happy for them to do so. It was probably not the intention of Dr King to put the boot in quite so vigorously but that was the effect.
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Buying Euro currency
In fairness, the success of the Euro against the Dollar had more to do with Dollar weakness than with Euro strength. The Euro zone too was starting to show signs of a slowdown in economic activity. As the month progressed the likelihood of the ECB actually raising Euro interest rates faded, even though inflation licked above its 2% target. Even so, the Euro is the only real alternative to the Dollar for investors with shed loads of cash to reallocate. If they want to be out of the Dollar they have to be in the Euro. No other currency is big enough to provide that sort of liquidity.
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The Pound's movements
For several months the Pound had managed to hang onto the Euro's coat tails. Northern Rock delivered the first kick in early September, pushing Sterling/Euro four cents lower. The Bank of England report provided the second in November and the Pound dropped another three cents. As November turned to December the Pound found some respite. Notably, in the run up to the December MPC meeting, unexpectedly strong figures for manufacturing and retail sales combined to persuade investors that the coming rate cut (for there is almost certain to be one) would not happen this year.
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Help for Sterling
It helped Sterling out of the mire. And boy did it need that help. The technical picture had been looking very gloomy. Long term support at €1.38 was threatened for several days. Had the Pound broken down through that level we would be looking at a target of €1.20 in the not-too-far distant future. Such a break is not yet out of the question. A surprise December interest rate cut could provoke the move, as could any number of nasty developments in the economy. And the scales are not weighted evenly for Sterling. Whilst a sharp downward move is a real prospect there is no similar risk on the upside.
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Find a currency broker – advice for French property buyers
Investors targeting French property need to pay careful attention to their currency exposures. A further 15% drop is not out of the question for Sterling. At the very least, hedge your exposure (Currency exchange options which save you money). Fix a price now for a minimum of half the Euros you intend to invest. If you don't need them until next year, buy them "forward" through a currency specialist (Advantages of using a currency broker or foreign exchange specialist), putting down a percentage deposit now and settling the balance at a future date.
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Currency exchange advice remains the same
This is consistent with the advice that we have given for a couple of months but the Pound's currently precarious position makes it more important than ever. Miracles can happen but they tend to happen to somebody else. Be careful.
Additional articles which may be of interest:
Currency Exchange - Buying Euros at the Best Rates - Your FAQs
Glossary of terms used in currency exchange
Feedback on currency brokers or foreign exchange dealers
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About the author
The information in this article has been supplied by the currency broker Moneycorp. For further advice on currency exchange and money markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility. Make your money go further!
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