Last week we saw a fluctuation of roughly 2.5% in the exchange rates across the week. We witnessed the GBP/EUR currency pairing sore to its highest level in more than 18 months with a high of 1.2116.
The movements came following a series of economic announcements in the Euro zone further proving the fragile state of their economy. Crucially last week we saw confidence fall in the Euro zone as whole following news that the condition of the European banking system may not be as healthy as investors have previously thought.
Investors thus looked to move funds elsewhere with the pound benefiting from this, following rumours that the UK may look to raise the base rate as early as the end of 2010. As we know when interest rates are hiked this is seen as positive for the corresponding currency as it makes investment more attractive.
As we have seen in the past Sterling strength is often followed by some retraction further emphasising the importance of buying your currency at the right time. With the growing volatility in the markets the use of a forward contract can benefit you in eliminating risk and safeguarding your funds.
The forward option takes time, interest rate differential and volatility in the market into consideration giving you the option of buying live to the markets on the day by paying a small deposit upfront, with a settlement period for the balance of up to 2 years.
Looking to the week ahead the most crucial decision may be the news that the Bank of England interest rate decision, just last week the OECD (Organization for economic co-operation and development) advised the MPC to get the Bank Rate back up to 3.5% by the end of 2011.
Any news that the Bank of England are looking to do this will likely encourage further investment in the UK strengthening the pound. With the Euro zone facing a decline in growth, as per the weak retail sales and industrial production data released this past week, the ECB are facing more complicated questions than just the standard yes/no on interest rate increases expected of a typical central bank when they make there announcement on Thursday 10th June.
Despite 11 years of monetary union, rifts in the competitiveness and fiscal profiles of more productive nations like Germany, and less-so ones like Greece make it difficult to frame a monetary policy suited to all member states. Talk of Germany leaving the Euro has grown recently and the ECB will be under pressure as president Jean-Claude Trichet is questioned later this week.
With all this in mind this week is likely to be a volatile one for the GBP/ EUR currency pairing, with the crucial decisions on the interest rates from the Bank of England and the ECB, and the growing uncertainty in the Eurozone.
Enquire today about opening a forward trading facility or to speak to our currency exchange specialist.