Interest rates possibly still to fall
After predicting for several months that Sterling would go down further against the Euro, the message this time is subtly different. Sterling may go down further against the Euro. Looking at the British economy and the Pound, little has changed in the last three months. House prices are still slipping. High Street retail sales are still growing more slowly. Manufacturing and industrial production is still slowing. Most important of all, interest rates still threaten to fall further. That, for investors, is major argument against holding Sterling.
Sterling held steady in January
Yet in January the Pound's seemingly endless slide came to a halt. Maybe it was the end of the decline and recovery is just around the corner. Maybe it was simply a pause on the road to nowhere. Either way, Sterling held steady, even bounced a little, but it did not go down. |
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Changes to ways of thinking afoot
The important change in January was the end of the idea that the UK economy is the only one that would be adversely affected by the impending recession in the States and other financial nastiness. Because that was the way many investors felt until recently. Everybody at the Bank of England, from the Governor down, seemed to be painting a verbal economic picture so loaded with doom and gloom that smiling was banned in Threadneedle Street. Meanwhile in Frankfurt, the European Central Bank honchos had stuck rigidly to a party line that held up inflation as the gravest threat to civilisation since the invention of "I can't believe it's not butter". Again and again Jean-Claude Trichet and his team harped on about the War on Inflation and how Euro interest rates would have to rise. There was not even a nod in the direction of any threat to the economy.
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Euro zone affected
Until January. Then in the space of a week two ECB Council members, both of them heads of their national central banks, apostatised. Each said, in his different way, that the Euro zone economy "faced downside risks". In other words, the Euro zone is not immune to global problems. It was the first time any such threat had been officially acknowledged and it changed the way investors looked at the whole situation.
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UK interest rates still likely to go down
There was no tidal flow of investment back into Sterling from the Euro. UK interest rates are still likely to go down and Euro interest rates will probably remain steady for a while. Even so, the playing field immediately became more level. Sterling/Euro stopped its plunge. The market started to look at both sides of the argument. It will be no easy job to regenerate investors' enthusiasm for the Pound, but at least they no longer see it as a one-way bet. It could fall further and the chart target at €1.20 still holds an evil fascination for Sterling bears (Glossary of terms used in currency exchange).
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Currency exchange advice for French property buyers
Our advice to those French property buyers is unchanged from last month - actually from last summer. The downside risk for Sterling is still significant. At the very least, hedge your exposure and buy half the Euros you intend to invest. If you want to be absolutely certain how much that €250,000 apartment will cost, buy the lot.
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Buying forward gives you peace of mind
Bear in mind that if you buy the Euros for forward settlement you will only have to hand over a percentage of the amount when you arrange the trade. You will not need to hand over the balance until your chosen settlement date, perhaps six months in the future. Because the exchange rate is fixed on day one you will know exactly how many Pounds you will be paying and exactly how many Euros you will receive. (Currency exchange options which save you money.)
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Lock into an exchange rate and buy forward
There are no longer so many storm clouds on Sterling's radar but that does not mean they are not lurking beyond the horizon. Again our advice is unchanged: Lock into an exchange rate and buy your Euros forward. Or be lucky.
Additional articles which may be of interest:
Currency Exchange - Buying Euros at the Best Rates - Your FAQs
Advantages of using a currency broker or foreign exchange specialist
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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