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Sterling is fluctuating
Sterling is no longer going down, it is fluctuating. Those were (almost) the words of veteran punter George Soros, a couple of months ago. The man reputed to have destroyed, single-handedly, Sterling's membership of the European Monetary System in 1992, said back in January that there was no further mileage in shorting the Pound. It had fallen as far as it was going to fall and it would "continue to fluctuate". Mr Soros was correct. Again.
Euros to Pound
On the first and last days of February Sterling/Euro traded at identical levels, just below €1.13. On more than half of the month's twenty trading days it traded at the same level. On the face of it, that does not look much like fluctuation, it looks like stability. When you look at the travel, a different picture appears. |
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Buying Euros
Ignoring the minor ups and downs, Sterling covered more than 40 cents, exploring a channel between €1.09 and €1.1550. Its 4% range looks modest in comparison with the goings-on in other financial markets, but it would have meant a difference of more than £10,000 on a €250,000 property investment if you had chanced to pick the wrong moment to buy your Euros.
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Long and deep recession on the cards – or maybe not?
Sterling has had a bad press in recent months, especially since last October when it was looking relatively cheerful near €1.30. The world's analysts came to the conclusion that Britain's recession would be deeper and longer than any other. They had their reasons and it may be that they were correct. The Pound might be headed back to parity and beyond. That is not what the numbers are showing at the moment.
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Historic data
Most economic data are historic in nature. They tell the story of what happened in the past, not what will happen in the future. Those numbers have leaned, if anything, in Sterling's favour recently. The economies of Britain and the Euro zone both shrank by 1.5% in the fourth quarter of 2008 (as did the United States). UK retail sales held up in December, rising by 1.6%, while Euro zone sales did not rise at all. At 8%, unemployment in the Euro zone is nearly two percentage points higher than in Britain. Industrial production in the Euro zone fell by 12% in 2008; UK production was down by 9.4%, bad enough but not so bad.
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Purchasing Managers' Index or PMI
Investors and central banks look elsewhere for a clue to what might be coming up on the economic horizon. A favourite indicator is the Purchasing Managers' Index. The PMI is an index that operates on a scale of 0-100. It is compiled from a survey of companies' current and expected business conditions. A figure above 50 implies business expansion. Below 50 it points to contraction. The results for February showed Switzerland, the United States, Euroland and Britain all reporting outcomes in the mid-30s. At 34.7, the UK figure was better than the Euro zone's 33.5. Again Britain seemed to have the edge.
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More worries for the Euro
There are other worries for the Euro in Eastern Europe. At the Brussels summit in early March, Western European leaders were asked for their help to support the ailing economies of Latvia, Hungary and other EU members in the east where boom is turning to bust. The response was not encouraging. Britain, France and Germany have their own pressing problems. Mssrs Brown, Sarkozy and Mrs Merkel were not overjoyed at the prospect of hitting their taxpayers for yet more money. Although the problem potentially affects the entire EU, it is the Euro that will bear the brunt if push turns to shove.
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Britain's economy keeping pace with Euro zone
According to the historic data, Britain's economy managed to keep pace with, and sometimes outstripped, the Euro zone, at least until the turn of the year. That has not prevented endless repetition of the litany that says Britain's recession will be deeper and longer than any other. It may even be true. Until there is evidence of it though, the Pound will continue to fluctuate.
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Exchange rate comparison
For most investors with an exposure to the Sterling/Euro exchange rate, that means the sensible policy is to hedge the risk. Fix a price now for half the Euros you will need and aim to cover the balance at a better level. (Currency exchange options which save you money.) If you need to be a hundred per cent certain how many Pounds you will have to spend on your French property purchase, the only thing to do is buy the Euros now at whatever the exchange rate happens to be. It will not be the best rate you could possibly achieve but it will mean peace of mind, at least until the Pound goes up. (Currency Exchange - Buying Euros at the Best Rates - Your FAQs.)
Additional articles which may be of interest:
Buying Euros
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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