By Matthew Boyle
Yesterday saw the European Central Bank drop its interest rates by 25 basis points (0.25%). The effect of lowering the rate weakens the Euro’s appeal to foreign investors and with it caused the Euro to weaken – USD/EUR rates moved almost a cent in the greenbacks favour and against the single currency. However, this did little for GBP>EUR rates, simply seeing it maintain at levels close to a 2 year-high but continuing to trade sideways under the ceiling of a well-established range.
Whilst the ECB stated yesterday it was not committed to further cuts this first move is likely the signal of more to come, with analysts pricing the next one in for September. This suggestion is supported as the ECB raised its inflation and growth forecasts which signals they are positioning and committing now to a cycle of rate cutting.
It seems now the next move is in the hands of the Pound and indeed eyes will look towards next week’s UK wage data and then inflation data in 2 weeks’ time as a clue to the Bank of England’s stance over the coming months. Whilst markets expect no change in interest rates in the June decision, a signal of a rate cute in August could be likely. With the upcoming UK general election, the chances of a cut before August are perhaps unlikely which in the short-term may offer support for current GBP/EUR rates. However, should markets begin to price in an August cut exchange rates will likely drop, and with Labour reported to be edging ahead in the polls the election poses a risk for GBP buying rates.
It looks increasingly likely the Tory government will be out and replaced with a Labour one, or what would be worse for exchange rates – a hung parliament and coalition government.
So fast forward a month and we could be looking at a coalition government with looming and impending rate cuts by the Bank of England. This combination could conceivably decimate GBP given where it currently stands and would likely see it drop from the current ceiling against EUR to the floor, then testing a break of the bottom of the range, nearly some 3% from where it currently stands, potentially increasing the cost of a €250k purchase by €7.5k.
Could this be the last chance saloon for GBP>EUR rates at these levels? Nobody can be sure of course, but speak to A Place in the Sun Currency today for some guidance on how we can assist you in removing the risk of the cost of your purchase increasing, events start to move rates back down.