By Matthew Boyle
Pound to Euro rates have remained close to the best levels they have been in two and a half years over the last week. With inflation figures in the UK remining level at 2.2% over the last 2 months, this has delayed the Bank of England cutting interest rates. Higher interest rates encourage foreign investment due to higher returns, so has kept the Pound buoyed over recent months. This contrasts with the Euro which has seen the European Central Bank cut rates twice already this year, weakening the Euro, and is the driving factor as to why GBP>EUR rates remain at these current highs.
Eurozone inflation figures yesterday showed a drop to 1.8% down from 2.2% shown in August, opening the door for further rate cuts from the ECB this year, with markets now pricing in a further 50bp cut by December.
Currently, inflation in the UK is keeping interest rates high and the fact that the ECB have cut and will probably do so again soon, is the primary reason we are seeing rates at these peak levels.
However, with the UK Budget at the end of this month and a cut in UK interest rates looming, don’t be surprised if these levels start to fade soon. Labour have been vocal about a harsh budget, having to plug a 22-billion-pound ‘black hole’. Tax rises in the UK would likely reduce spending, which could bring inflation down and in turn may well catalyse the BoE to cut rates – likely weakening the Pound and so causing rates to drop.
Given GBP>EUR rates haven’t pushed higher in 2.5 years it is hard to see at present want could cause a push higher, whilst the current landscape suggests that downside risk remains high.
Taking advantage of a forward contract which we offer would allow you to take advantage of rates at the current levels, removing the risk of a rate drop whilst giving you the peace of mind and security of knowing the cost of your future purchase.
Furthermore, it allows you to retain 90% of your funds in your bank earning you interest throughout the term of the contract too (essentially boosting the exchange rate). This could be a great tool for anyone with a future Euro requirement.
Elsewhere we have seen the USD strengthen following fears of an Iranian missile attack on Israel.
As a result, demand and the price of Gold, oil and overall, the safe-haven currency of the Dollar rose significantly yesterday. The increasing threat in the middle east sparked the Dollar to gain strength not only against the major currencies, rising around 1% against both the Pound and Euro, but other currencies across the board. With tensions in the middle east rising, this USD strength could continue. Political uncertainty amidst the US elections have in recent months weakened the Dollar. Whilst US data dominates this week with unemployment data today and non-farm payroll data released Friday, we could now see the Greenback start a run. Given the ongoing military conflict in the Middle East, and the upcoming election result on November 5th when certainty will return to US markets, don’t be surprised if we see a dip in GBP>USD rates.
With the USD getting stronger, the UK budget this month and impending interest rate cuts from the BoE, and despite impending rate cuts from the ECB, rates could be in for some volatility. While GBP>USD rates are dropping, GBP>EUR rates remain close to the best they have been since early 2022.
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