By Matthew Boyle
After seeing the pound stretch to fresh 2-year highs against the Euro some analysts are suggesting it could be the end of the party for GBP and we may start to see a period of depreciation for GBP buying rates.
Many will be surprised given where rates are currently positioned given the UK election and the uncertainty it brings. Indeed historically elections do put downward pressure on a currency but suggestion the new Labour government might bring with it better relations with the EU has encouraged GBP/EUR rates. Combined with political unrest in France seeing their own election and Le Pen’s right wing party gain a larger foothold a weakened Euro has seen rates push to a new 2 year high.
However, as the dust of elections settles it looks as if the main driver of FX rates over the last couple of years will return to take control of the market – Interest rates, and this could be the downfall of GBP>EUR rates in the short-term.
We saw UK inflation fall under the targeted 2% level in June but with the election it was never likely the Bank of England would act prior to the result. With the election over it is back to business and markets are pricing in an over 60% chance we will see the BoE cut in August. Should they cut rates the impact would be potential GBP weakness and could see rates drop back. Perhaps more concerning is that this cut is likely to be the first of many by the Bank of England in the coming months.
Whilst the ECB will be making their own cuts analysts suggest the BoE are likely to be more aggressive with their programme and as such GBP will take more of a hit in the coming months than the EUR. Those with a requirement to buy Euros in the coming months may want to consider this and take advantage with the rates at peak levels.
The remainder of this week is relatively quiet in terms of UK data other than some manufacturing data tomorrow but that doesn’t mean we won’t see movement driven from data elsewhere. German inflation data is released tomorrow which is always a big indicator of Eurozone And Euro performance. However, it is the Dollar that dominates the releases this week as we see the FED’s Chair Powell speak this afternoon and US inflation data tomorrow – those with a Dollar requirement may want to stay in close touch.
And with GBP>EUR rates at a 2 year high and some analysts suggesting the party could be over for the Pound, speak to us at A Place in the Sun Currency should you have an upcoming requirement, for some friendly guidance on how to make your money go further.