Where is the exchange rate going?
First of all, let’s be clear about this, nobody can actually predict with certainty what’s going to happen in the currency markets, even if they say they can. So, calling this article “market predictions” means just that. It’s a prediction; a guess… An educated guess, but still a guess! Before looking forward, we should take a look where exchange rates have been and where they are now, and check the state of the economy in general with a little help from world first UK.
Calm, but no storm (yet)
Recent encouraging economic data has brought with it a period of calm, which has enabled exchange rates to stabilise somewhat, and even to improve a little, from a sterling point of view.
The markets appear to have cautiously acknowledged that the British economy is on an upward curve, and we’re continuing to see the green shoots of recovery in the UK economy. It still remains fragile though, and we’re mindful that at any time, some bad data could come along and knock us off course.
Facts and figures
We’ve recently seen GDP for the second quarter of 2013 confirmed at 0.7%, and the year on year figure revised from 1.5% to 1.3%. The hope is that the growth we’ve seen in Q2 will continue as we move towards the end of the year. But a note of caution; a strong summer, with high street sales boosted by some half decent weather for a change, could just mean that people spent the money they had then rather than later in the year. As people look to save some money for the Christmas run-in, the interim period covered by the end of Q3 and start of Q4 could prove to be a damp squib.
Consumers have been the catalyst for growth, with other sectors (manufacturing and construction, for example) only just starting to add to recent successes from the retail sector. Without their buying power, things may dip again, and that could mean reduced pound strength. That said, strength in other sectors could supercede that seen in retail. We saw UK construction – probably the most vulnerable sector – grow 2.2% in July, beating estimates, and starting Q3 strongly.
UK unemployment has continued to fall, an indicator of an improving economy, but as with all other indicators, we’re not getting carried away. There’s a certain nervousness that things could quickly turn around again, causing sterling to weaken.
Any movement in the exchange rate?
Cautious optimism is the order of the day, and hence we’re not expecting too much movement in the currency markets one way or the other in the coming months. The GBPEUR rate has been hovering around 1.19 recently, but don’t put your house on it rising to 1.20 or higher. Any higher than that, and UK goods would become more expensive and therefore less attractive for foreign importers – The Bank of England may step in and weaken the pound before we got to that point.
But as we said at the top, while there’s no harm in predicting where the exchange rate’s going, just don’t expect to be right every time.