Predicting currency movement
Currency predictions are, by definition, hostages to fortune. Like political careers, almost every forecast is doomed to failure. Assumptions fail to materialise. Economies change direction. "Obvious" policy decisions turn out to be less obvious than originally thought. This is the position in the days leading up to the Bank of England's Monetary Policy Committee meeting when they will "obviously" raise the Bank Rate from 5.5 to 5.75%.
Higher interest rates were expected
Everyone at the Bank, from the Governor to the lowliest member of the MPC, dropped the heaviest possible hints that the cycle of monetary tightening would continue. In interviews, in the minutes of the June meeting, in speeches and in testimony to parliamentary committees they all pointed to higher interest rates this summer. |
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Foreign exchange advice is to buy Stirling
Now, it almost does not matter what they do. The world has heard the message. UK interest rates are going up. And the world, at least the world of foreign exchange, knows just what to do about it. Buy Sterling. Rising interest rate = rising currency. As Jane Austen might have put it; “It is a truth universally acknowledged that a single currency in possession of a good interest rate must be in want of a buyer”.
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What next?
Problem is, once you have bought it, then what? Investors, good investors, anyway, are not collectors or hoarders. They buy something, its price goes up and then they sell it to take the profit. Sterling finds itself in that unfortunate situation at the beginning of July. Investors have bought it and its price has gone up. What happens next, we ask ourselves?
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Pound versus Dollar
The Pound looks good against the Dollar. Almost everything apart from the Yen looks good against the Dollar because people are worried about the US economy. Where house prices are going up in Britain (for the time being) they are going down in the States. Sterling is at, or close to, its highest level for a generation against the US Dollar.
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Pound versus Euro
The Pound's relationship with the Euro is not the same. For more than three months the Pound wandered between €1.46 and €1.48 going nowhere. The market was happy with that relationship. At the end of June the uppity Pound decided to make a break for the hills. For several days it managed to hold above €1.48. Then, with the MPC meeting just days away, it stumbled and fell. Nobody was particularly surprised, the Pound is always pulling stunts like that. But it was a bit embarrassing. Even before the MPC had delivered its verdict, whatever it was going to be, investors decided that a profit was a profit and they took it.
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UK economy still performing ok
There is nothing wrong with Sterling. The UK economy is performing as well as any of its peer group. Its interest rate is at least as attractive as any sensible currency this side of the equator. It is not a basket case by any means. But that does not mean that it is immune to the ebb and flow of investor sentiment. €1.49 today, €1.46 tomorrow. That's the way the croissant crumbles in Europe.
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Advice for French property buyers – buy Euros forward
If you are planning to invest in French property this summer, now is the time to lock into the currency. Sterling has fallen at the €1.49 fence too often to ignore the fact. Yes, it could go back to the recent highs above €1.50. It could exceed those levels. But, equally well, it could subside to the €1.43 that we saw last year or the €1.41 of 2005. Buy your Euros forward. Learn about buying forward in "Currency exchange options which save you money".
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Currency exchange brokers
Whether or not you have the full purchase price of that chateau in your Sterling bank account, you probably have 10% of it to hand. With that deposit you can strike a deal with a currency specialist firm to lock into today's exchange rate, with settlement in three, or four, or however many months' time. Advantages of using a currency broker or foreign exchange specialist.
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Forward transactions let you know where you stand
Sterling is an eccentric currency. It might thrive after the MPC decision, it might chew its own legs off. With a forward purchase of Euros it won't matter. You will know exactly where you stand, exactly how many Pounds you will have to pay for exactly how many Euros.
Additional article which may be of interest:
Currency Exchange - Buying Euros at the Best Rates - Your FAQs
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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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