Sterling exchange rate forecast

I’m anticipating limited movement for sterling against most major currencies today as the Bank of England minutes and government spending cuts tomorrow will cause currency speculators to sit tight in advance of this news.

This means that for any risk adverse clients now may be the ideal time to secure your foreign currency and eliminate any risk of exchange rates moving against you this week. For those who have slightly higher appetite for risk, it’s important to consider how this week’s key issues could affect the value of your sterling, whther you need to buy or sell.

The Bank of England (BoE) minutes are expected to give some insight into how likely further QE is for the UK. Previously when the BoE has increased the money supply it has caused the pound to fall in value. Another bout of QE could cause sterling exchange rates to fall. In 2009, the last time the BoE pumped funds into the economy sterling lost around 4% against the Euro and US Dollar and I would expect to see a similar scale of losses, should QE be extended.

The minutes will not result in additional QE tomorrow, but they may give us some insight into how likely this is. I would not be at all surprised to see the pound lose 2-3 cents, vs. EUR and USD if the minutes from last month’s meeting show an increased number of the MPC members (Monetary Policy Committee), voting for further QE.

Also worth keeping an eye on is Mervyn King’s speech tonight at 19:50, this may also give a few hints on how likely QE is, as well as when the BoE anticipate being able to increase interest rates…. something that looks highly unlikely in the short term.

The second key market mover for sterling exchange rates this week is the government spending cuts due to be announced at midday tomorrow. The austerity measures are the most severe we have ever experienced in the UK and are expected to lead to significant job losses. This could result in increasing unemployment which in turn would be expected to have a negative effect on the economy and sterling. Retail sales in particular, which make up 60% of the UK’s GDP, could be adversely affected and subsequently economic recovery is likely to be jittery in the UK.
The Ernst and Young Item club announced yesterday, slow recovery is likely over the winter. This may have a negative effect on sterling as it makes the UK economy less attractive to investors, therefore reducing demand for the pound. Couple this reduced demand with expectations of an increase in supply through QE, and the outlook is quite bleak for sterling exchange rates. I would not be at all surprised to see GBPEUR fall below 1.10 and GBPUSD fall below 1.50 before the end of the year.

If you need to buy foreign currency but don’t have full availability of funds, for a small deposit you can lock into a forward contract to protect yourself from any adverse market movement. You cna find out more about forward contracts by speaking to a currency expert on 01494 787478.