Sterling Exchange Rate Overview

The following report will aim to assist you in making the decision to get the best exchange rates for your currency transfer, whether you need to exchange foreign currency for a business import/export  requirement or are buying property abroad.  The focus will be on;

• The current view of the Pound
• Events in Europe and some other currencies
• US economic concerns
• The strength of the Japanese Yen

Sterling Forecast
Sterling took a knock in early trading yesterday but fought back against nearly all currencies to close higher than where it started the day.  Fears over government austerity measures still abound with concern that if the government cuts too much the economy could head back into recession, but on the other hand if it doesn’t cut enough then the national debt deficit could balloon and jeopardise the UK’s AAA credit rating (see the importance of credit ratings in the next section).   For example whilst Greece has made drastic cuts to reduce its loans its economy has now shrunk by 1.5%.With even members of the Bank of England’s own MPC uncertain that the UK will avoid a second recession, now may be a good time to secure your rate on certain currencies to avoid any risk of the Pound falling away in the coming months.

Ireland The Latest Credit Rating Downgrade…
Standard & Poors has downgraded Ireland’s credit rating to AA- over concerns about the growing cost the government there face in propping up the banking sector.  A lower credit rating increases the cost of borrowing for governments as they have to pay more to cover the perceived greater risk the investor takes to lend them the money, and in turn makes it harder to finance large deficits (hence why it is vital the UK maintain the highest rating of AAA).

This follows cuts in the ratings of Greece, Spain and Portugal and also adds to the problems of the Eurozone with French growth figures slowing and Belgium in difficulty.  Germany, albeit the largest economy in the Eurozone, is the only country showing healthy growth and signs of improvement so it remains to be seen as to how long Germany can maintain the strength of the Euro based on it’s own economic performance.  Should the situation in other European states deteriorate further, then will Germany be able to bail them out- a move which will no doubt be hugely unpopular with the German public.  As such the longer term forecast for the Euro would seem to point to a weakening against the Pound so if you are looking to sell a property in Europe it may be prudent to move sooner rather than later.

Indeed, Nick Clegg was forced to condemn a “partial report” from the Institute for Fiscal Studies which said the latest budget would hit the poorest British families the hardest.  This balancing act for the coalition government of where to cut and by how much is a precarious one and as such sterling exchange rates remain very vulnerable.  Revised UK GDP figures due out on Friday could dictate whether the UK economy is faltering, and if so the value of the Pound is likely to fall, risking sub 1.20 rates on the Euro.

Dollar Weakens On Home Sales And Durable Goods Concerns…
The Dollar slipped slightly against the Pound yesterday as New Home Sales data came in worse than anticipated and Durable Goods orders softened.  The news once again highlighted concerns  that the US may face a double dip recession and if realised could push Cable through the 1.60 barrier.  Initial jobless claims this afternoon may give a further clue to the health of the economy Stateside- close attention will also be paid to US GDP data on Friday.

Expect a big reaction on exchange rates depending on whether the data is better or worse than expected.  The news will not just affect the Dollar but nearly all currencies as it will be seen as an indicator of how the global economy may fare in future.  Should you not wish to gamble on Friday’s outcome then why not look at using a forward contract?  Speak to one of our experienced currency brokers to find out how.

Japanese Yen To Weaken?
The Yen hit a 15 year high against the Dollar yesterday as investors continue to see the currency as a safe haven during economic uncertainty globally.  The Pound gained over 1.4% yesterday (as seen in the table) which is an extra Yen amount of 361,788 on a £200k purchase.

The problem for Japan is that as a leading exporter, the Yen becoming more expensive makes their goods and services a lot more expensive.  Rumours abound that the Japanese government will have to intervene to artificially weaken the currency to help exporters as they did in 2004 which could be great news for anyone looking to buy Yen.  Should this occur it would be no surprise to see levels of 150 again.   If this happens keep an eye on the Aussie Dollar in particular as the currency pair is often the subject of carry trading (whereby an investor borrows funds in a lower interest yielding currency, namely Yen, and uses it to invest in a higher interest yielding one, namely the Aussie).

A sharp change in the Yen value may cause a number of these carry trades to be unwound as they dump the Dollar to cover the original Yen positions- a move which could cause huge volatility in Aussie rates.  The current hung parliament in Australia is unlikely to help the strength of the currency down under overall as decisive government actions become more difficult, but the fact that the recent super tax on mining profits may have to be further watered down should help keep the currency strong.