After Wednesdays post GBP/USD exchange rates dropped to their lowest level this week, cable fell back to $1.4971 which means we have now seen a 1.5% swing in exchange rates over the last 7 days. Today's post will take a closer look at events in the last 48 hours that have impacted exchange rates and what my thoughts are for the next couple of weeks.
As I have mentioned a few times over the last few days, yesterday (Thursday) was an important day in terms announcements with the Bank of England (BoE) and the European Central Bank (ECB) set to give the results of their monthly meetings.
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First up was the BoE and as expected policymakers refrained from cutting interest rates and adding to the existing Quantitative Easing (QE) plan, which has so far seen the bank pump £375 billion into the UK economy in an attempt to stimulate growth. After the results were published things started to pick up for sterling as rates jumped by half a point in a matter of seconds to recover some of the lost ground we saw on Wednesday, reaching the day high of $1.5081.
However, the gains were extremely short lived as less than an hour later Mario Draghi (the head of the ECB) spoke at his monthly press conference. During his speech Mr Draghi said that the Central bank will keep interest rates on hold and that he expects the euro-zone economy to stabilise over the course of the year. He also went on to say that growth could well return in 2014 although downside risks still remained.
In recent weeks Mr Draghi has done a very good job of talking up the Euro and giving the Euro-zone a positive spin. Yesterday was no different and over the course of the day sterling dollar exchange rates suffered and started to tail off.
In Wednesday post I said that no QE from the BoE could lead to some short term gains for exchange rates but I wasn't expecting them to only last 45 minutes! The moves we have seen this week, despite some positive data for the UK goes to show just how volatile the currency markets are at the moment. I also expect the big swings we have seen in rates for cable to continue for the next couple of weeks and it will be interesting to see how the markets react when the minutes from the BoE meeting are released towards the end of the month.
So where do I see exchange rates going?
With the U.S dollar seen as a safe haven currency, I think it is unlikely we will see any major gains for sterling unless we see a sudden change in risk appetite. At the moment the euro seems to be a preferred option for investors, especially since the UK had its credit rating downgraded last week. The problem for sterling at the moment is that if investors were to leave the greenback, safe haven flows out of the dollar are unlikely to have any real impact on exchange rates with pressure mounting on the UK economy.
If we see a run of negative data coming from the UK in coming weeks there is every chance we could see exchange rates fall back towards $1.45.
What should you do?
If you are a business or private client and have a requirement to move currency in the next few months, it is important you are aware of the different types of contract that are available to help make the most of your currency transfer. If you would like more information on the contract or would like to discuss exchange rates in more detail click on the link below for a free no obligation consultation.
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