Exchange rate comparison
Today we are going to discuss déjà vu. Again. For a fourth month, in August Sterling's daily average price against the Euro was close to €1.26, in this case €1.2614. Whether it will be possible to make a similar introduction in a month's time is highly doubtful.
Sterling's downturn
Sterling's uneventful life came to an abrupt end on the last Saturday of August when The Guardian published an interview with Chancellor of the Exchequer Alistair Darling. Mr Darling had until than cultivated the appearance of a grey politician, in more ways than the obvious one. He had clung stubbornly to the party line that Britain's economy would grow more slowly in 2008 and 2009 because of the credit crunch and the stagnating housing market, but that it would, nevertheless, grow. In his interview with the paper he appeared to abandon that pretence. "Britain is facing 'arguably the worst' economic downturn in 60 years which will be 'more profound and long-lasting' than people had expected." |
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Euros to Pound
Investors had become accustomed to dire economic warnings from Mervyn King, the Bank of England Governor, but this was the first time the government itself had acknowledged the depth of the problem. By the time the London market opened on Monday morning the Pound was a good two cents lower against the Dollar and a cent down on the Euro.
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A sinking Pound
Mr Darling and the Downing Street spin-meisters spent Sunday and Monday trying to put the genie back in the bottle but it was too late. Whether Mr Darling spoke unguardedly or The Guardian misrepresented the context of his remarks is neither here nor there. The British chancellor had apparently joined his central banker in a surrealist plot to throw concrete lifebelts at a sinking Pound.
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Euro interest rates
The Euro, meanwhile, was enjoying more constructive support from its supporters. Axel Weber, head of the Bundesbank and ex-officio member of the European Central Bank Governing Council, had told journalists the previous week that "the discussion about declining rates in Europe is premature." He didn't say rates were not going down, nor that they were going up, just that the market should not jump the gun. Effectively, he reiterated earlier comments by his boss that the ECB council has "no bias" towards higher or lower Euro interest rates. It will make its decisions month by month as always.
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Euro interest rates to rise?
But the FX market is never one to let boring facts get in the way of a good story. Its knee-jerk reaction was to deduce that if it was premature to expect lower rates they might therefore be going up. Non-sequitur or not, it was enough to push the Euro firmer against the soon-to-be-ailing Pound.
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Euro vs Pound
There is a lot of it around at the moment, this specious logic that sees the Euro through rose-tinted spectacles and throws murderous glances at the Pound. Granted, the chancellor's ill-judged interview did not help matters but hardly anyone has argued with his sentiment. Investors are simply astonished that he said it. But say it he did and Sterling will have to live with the consequences, which may turn out to be even more severe.
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Buying Euros
Sterling once again looks vulnerable to a test of its 1995 lows (against the ECU) below €1.20. So if you are thinking of, or in the process of buying a property in France, and you need to buy Euros in the next few weeks or months, buy a good chunk of them now for forward settlement. (Currency exchange options which save you money.) Until the end of August and Mr Darling's utterances, the Pound was due for a technical upward correction. It isn't any more. If (when?) Sterling gets down to €1.1850 it might be a different story but that is five cents further down a slippery and treacherous path. Hedge your exposure. (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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