For any transfer or payment into Euro you or your buyers need to make I would suggest you may want to understand when GBP has reached a good, perhaps, overvalued level when compared against EURO. Please take the time to read through the following reasons;
In general the pound has continually weakened off against the single currency since the beginning of the year. Sterling has dropped from 1.2360 to as low as 1.1345 by February. Since then we have seen a slight improvement although we have yet to regain ground above 1.19.
The current level of 1.17 may represent good value considering the debt of the drop so far during 2013.
U.Ks potential to slip to a triple dip recession before records begun
1. The National Institute of Economic and Social Research have released their first estimate of the U.Ks GDP for quarter one last week at plus 0.1%. Anything under 0% shows a contraction. This quarter is arguably the most important GDP release for the U.K since records begun because if it does show a drop below 0 then it means the U.K is in contraction and will enter a triple dip recession. This is the first time this will have happened and the result will be likely lead through to decreased investor confidence sparking a selloff in U.K assets and sterling so that investors can move their funds to more secure investment locations. The 0.1% estimate shows the U.K growth is finely balanced. and the finalised GDP figure is known to drop well below what was originally forecast in the first estimate. GDP figures are continually revised after release.
Investors regaining confidence in Europe’s struggling economies
2. Bond auctions are the sale of government debt. A yield of a bond is the contracted return on investment that is paid to the bond purchaser for the duration contract. The higher the yield the riskier the investment as a premium is attached. A good example of the yield differentials prevalent between some of the southern Mediterranean EU nations and their northern neighbours can be identified on 10 year debt, where Germany (the economic powerhouse of Europe) currently pays yields under 1.5% representing a safe and in demand investment, whereas both Spain and Italy are closer to 5% for similar 10 year bonds. These two countries are arguably the biggest future problem countries for Europe requiring a bailout if they cannot turn around their struggling economies. However the fact that their bond yields are slowly decreasing represents an improved investor confidence, thanks in part to ECB President Mario Draghi’s Outright Monetary Transaction initiative which will underwrite a nations bonds to a degree when yields rise too far and help is officially sought.
Head of European Monetary fund comments potential turmoil
3. Christine Lagarde (Head of the International Monetary Fund) commented last week that the U.Ks economic quantitative easing programme is going to do ‘long term damage to the associated economies and their financial sector’. She is basically saying the injection of stimulus cash from the Bank of England’s new monetary policy is simply providing a ‘short term sugar rush’ to the U.Ks economy. One could argue that Lagarde is pointing towards a GBP policy that is an economic ticking time bomb and that it is only a matter of time before the economy suffers from a ‘false cash injection’ and sterling will ultimately weaken off. Quantitative Easing and Bank of England initiatives will likely remain at the forefront whilst the UK’s economy struggles. With a New Governor due to take the helm of the BK of E in July, be prepared for new measures to stimulate the economy.
Bankers Bonuses Cap and increased U.K financial regulation
4. Although the general consensus is that bankers should not receive colossus bonuses, this new regulation is likely to be harmful to the U.K economy. The U.Ks biggest service export is financial services. This new bankers bonus’s cap it is likely to decrease the U.Ks competitiveness within the finance and banking sector simply because of the ‘brain-drain’ movement of talent from the City across to countries where they will simply pay the top performers bigger bonuses. The U.S, Hong Kong and Switzerland are good examples of countries that have traditionally strong finance sectors that are not bound by this new regulation.
Portugal and Ireland having their loan repayment time frames extended
5. Portugal and Ireland received sizable loans to help avoid defaulting from the Euro in recent years (particularly Ireland). Both countries have received extended time frames as a result of a direct appeal to repay these debts. This means that re-investment can be injected back into their own economies creating more stability across the Eurozone as these countries are not as tightly bound or struggling to pay back unachievable debts.
U.K trade balance negative
6. The U.Ks trade balance was recorded last week at a £9.4 Billion deficit. This reflects the state of the country’s ‘current account’; the difference between imports and exports. This release was nearly one billion worse than forecast and still shows that the U.K is struggling to balance its imports with its exports. In its most simplest terms the U.K is still spending more than it is generating.
There are obviously arguments for GBP to strengthen against the Euro as well but most of the data release and general sentiment on the U.K in recent weeks has looked very negative and does not paint a very good picture for the future of the U.K economy.
I hope this helps. Please feel free to contact us. We can guide and comment directly how best to service your Euro requirement.
Please contact Lauren Bessent from Moneycorp;
[email protected]
0207 828 7000