Sterling goes nowhere
After behaving itself impeccably for a month, Sterling has blotted its copybook again. It went nowhere in May, starting and ending the month as close to €1.27 as makes no odds. It made a show of activity, exploring a four cent range against the Euro, but displayed no determination. A brief trip north took it to within a cent of €1.30, whereupon it turned tail and fled back to what has become its comfort zone in the mid-1.20s.
Slowdown for all
It could have been worse. There was no shortage of unhelpful data from the British economy. Apart from some misleading information from Rightmove, suggesting that prices were rising, every house price index showed further slowdown in the residential property market. Mortgage approvals continued their decline as unwilling lenders and unenthusiastic borrowers found common ground. Consumer confidence faded and retailers struggled to shift their stocks. Yet investors were, by and large, undismayed. However bad the shape of the UK housing market, it seemed in the rudest of health compared with the horror story developing across the Atlantic. |
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Bank Rate unchanged
Unusually, the Bank of England's input was positive for its currency. The Bank's Financial Stability Review put a positive spin on the economic situation, saying that "conditions are likely to improve as confidence and risk appetite recover." The Monetary Policy Committee (MPC) voted 8:1 to keep the Bank Rate unchanged at 5%, with only one member voting for a cut.
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Close attention is paid to inflation expectations
In the minutes of the meeting the MPC revealed that it pays close attention to "inflation expectations" as well as the inflation rate itself. If the public expects inflation to accelerate, it will generate upward pressure on both prices and wage negotiations. So when Citigroup's survey showed that a third of people expect inflation to be above 5% in a year's time, the market assumed that it would make the bank more reluctant to cut interest rates.
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No rate cuts for Euro - yet
There has been no talk of rate cuts for the Euro since the latest CPI figures put inflation in the Euro zone even further above its target range. Euroland's unfortunate combination of slowing growth and rising inflation is not unique, but the European Central Bank is taking a tougher line than most of its peers. The chances of lower Euro rates this year were already either slim or none and Slim left town when CPI inflation ticked up to 3.6%.
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Euro also affected by slowdown
But any joy among investors at the prospect of continued high Euro interest rates has been tempered by data suggesting that the Euro zone has not escaped the slowdown affecting most of the developed world. Most noticeable is the data from Germany showing downturns in business confidence, consumer confidence, manufacturing and employment. There is more to the Euro zone than just Germany, but with the Club Med economies in the south already on the back foot, softness in Euroland's biggest economy has not been helpful for the Euro.
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Investors wary of Sterling
The curtain-opener for June was not one to be relished by Sterling's supporters, another banking crisis. Alright, it is not so much a crisis, more a comedy of errors, but the performance at Bradford & Bingley is not a ringing endorsement of British financial competence. It did not help that the B&B news came out at the same time as Standard & Poor's downgraded three major US brokerage firms on the negative outlook for the financial sector. B&B may not be Northern Rock, but, as far as the market is concerned, the parallels are too close for comfort. This latest "crisis" undoubtedly has further to run and investors will probably be wary about Sterling for some time.
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Currency exchange rate not improving
Sterling has yet to provide the buying opportunity for Euros above €1.30 that we have been looking for. It did trade close to €1.29 in May but quickly fell back. Unless the B&B situation reveals unsuspected skeletons in the UK financial system's closet the problem should eventually blow over (though not for B&B's long-suffering shareholders). In the meantime, however, Sterling will probably remain under pressure.
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Buying Euro currency
If you are planning a property purchase in France this summer, the only way to be sure how much it will cost in terms of Sterling is to arrange to buy the Euros now. (Currency exchange options which save you money.) Put down a percentage deposit, pick an appropriate date to settle the transaction, maybe a few months ahead, and agree an exchange rate. It will not be the best Sterling/Euro exchange rate you have ever seen but at least it won't be the worst (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
Feedback on currency brokers or foreign exchange dealers
Glossary of terms used in currency exchange
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About the author
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