Sterling's outlook is not rosy
As 2008 gets into its swing the outlook for Sterling is looking anything but rosy. A dire performance in the last three months of last year saw the Pound lose 8% of its value against the Euro and there is nothing to suggest that the first three months of this year will be any more comfortable. Until the queues formed outside Northern Rock the Pound looked as though it would be able to potter on forever, vaguely in step with the Euro. For ten years it had held mainly between €1.40 and €1.70 against the Euro and its predecessor, the ECU. For the last four years it had maintained an even tighter range than that; €1.40 to €1.53. The wheels came off in September and not only have they not been replaced, they are nowhere to be found.
Inflation is too high
The market is tolerant of the occasional mediocre economic statistic from the Euro zone, because the European Central Bank (ECB) continues to run a hawkish monetary policy. Inflation is too high, it threatens to go even higher and the ECB - or so it claims - is prepared to fight that threat with higher interest rates. |
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Euro interest rates to remain as high as possible?
Analysts are divided as to whether the ECB can go as far as actually tightening policy: it is after all fighting on a second front to combat money market illiquidity. Still, most are convinced that Euro interest rates will be held as high as possible for as long as possible and that makes the Euro relatively attractive.
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More Sterling interest rate cuts in the pipeline?
In London on the other hand, the Bank of England goes out of its way to highlight dangers to the economy. At December's meeting the Monetary Policy Committee (MPC) was unanimous in voting for a rate cut. MPC unanimity is not unheard of but it is unusual enough to attract attention. If the MPC was so sure a December rate cut was necessary, surely there must be more cuts in the pipeline. Never mind the giant leap of faith implicit in that logic; investors believe it to be the case and they are staying away from Sterling in their droves.
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Charts pave the way
So the promise of firmer Euro interest rates attracts the punters and the threat of lower Sterling rates repels them. This has led to a new danger from the technical analysts. Charts - graphs - of price action in financial markets are an important tool in the investor's box. They are easy to compile, easy to look at and some of the formations that appear on them are easy to recognise.
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The Pound could fall further
On the long term chart of Sterling against the Euro (nee ECU) a "head and shoulders" pattern has formed over the last ten years. The downward break of this formation's "neck-line" that happened at the very end of December suggests that the Pound could fall further. No support is obvious on the chart this side of €1.20. And that's quite a bit lower than today's price. Critics argue that charts are unscientific, that at best they are self-fulfilling prophesies. But many investors will be looking at the same chart and the same pattern today. They will be positioning themselves to help that prophesy come true and make money if it does.
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Advice for French property buyers
For French property buyers based in the UK, our recommendation remains unchanged since summer. The downside risk for Sterling is too great to ignore. At the very least, hedge your exposure and buy half the Euros you intend to invest. If you want to be absolutely certain about how many Pounds that €250,000 cottage will cost, buy the lot. (Currency exchange options which save you money.)
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Currency exchange options and forward transactions
To minimise the impact on near term cash flow do it for "forward" settlement so you only have to find a percentage deposit up front. With the exchange rate fixed on day one, you can be sure of how many Pounds you will have to spend in total and how many Euros you will receive in return when settlement day arrives. Although we cannot be certain that Sterling will continue to fall there is nothing to suggest that it won't. Either lock into an exchange rate or be lucky. (Currency Exchange - Buying Euros at the Best Rates - Your FAQs.)
Additional articles which may be of interest:
Advantages of using a currency broker or foreign exchange specialist
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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