It is important to always keep one eye on the currency markets and to avoid the risk of exchange rate fluctuations wherever possible – working with a dedicated currency specialist will bring you peace of mind and enable you to stay on top of the effects of any political and economic events on your international payments and assets.
The first half of 2015 has already been volatile for both currency and financial markets, following recent political and economic events, the key economic stories affecting the market in the second quarter of 2015 being the ongoing debt crisis in Greece and the UK General Election.
April to June 2015 currency exchange rates – Sterling-Euro
Month Average High Low
April £1.3821 £1.3983 £1.3584
May £1.3829 £1.4122 £1.3454
June £1.3875 £1.4165 £1.3594
July £1.4108 £1.4420 £1.3842
Year £1.3908 £1.4172 £1.3618
*Rates correct at 21 July 2015
Busy times for the UK
UK markets tensed in anticipation of the country’s General Election in May. Poll results were close, and potential outcomes were plentiful, with a Conservative-led coalition, Labour-led coalition, or a minority government seeming likely prospects. Markets greeted the eventual outcome of a Conservative majority with surprise – but were able to take advantage of this ‘business as usual’ result. Sterling also weakened in response to the Chancellor’s July Budget, with investors cautious over backing sterling ahead of a budget which was widely expected to show a tightening of fiscal policy in the UK. The eternal question remains: when will be the right time for the Bank of England (BoE) to raise interest rates? Should the UK achieve stable growth levels, it will still be influenced by events abroad which could hold off on a rate hike, such as the debt crisis in Greece, oil prices and China’s shaky expansion path. Yet increased commentary from the BoE and minutes of the latest Monetary Policy Committee meeting which show indicative votes for an interest rate hike point towards an increase perhaps sooner than expected.
The Greece situation continues to dominate events in the Eurozone
The crisis in Greece dominated headlines last quarter – and continues to do so. Governing anti-austerity party Syriza stuck to its guns as it twisted and turned, using its emergency International Monetary Fund (IMF) funds for one debt repayment, and securing extensions on others. The Greek Government, led by Prime Minister Alexis Tsipras, refused to give way – despite continued negotiations from both sides. The Greek public voted against bailout conditions in a spot referendum.
Recent positive developments in the negotiations should have been positive news for the euro, with the resolution of the Greek debt discussions that have dragged on throughout the year so far. Despite this, the euro fell to its lowest level against sterling for eight years. With the bailout for Greece hopefully being confirmed imminently, only time will tell whether the euro strengthens accordingly.
It’s important to note that what plays out in Greece now could set a precedent for other countries. Spain will hold an election later in the year; any concessions afforded to Greece could pave way for concessions in the former’s debt negotiations. As the situation continues to play out in Greece, the rest of the Eurozone hangs on tenterhooks as the unity of the Eurozone is severely tested.
Eurozone shares plummet following economic uncertainty
Political and economic volatility does not just affect the currency markets. Lloyds analysts currently believe that the ongoing developments in the Eurozone have caused investors to flee to safer alternatives. Eurozone shares have had the largest annual decline in sentiment on record, dropping 19 percentage points in just a month.
Billed by Lloyds as a classic response from investors during the dramatic events taking place within the Eurozone, their latest figures show investor sentiment for Eurozone shares has crashed to -48 per cent, down a massive 30 percentage points over the past year.
While the riskier assets, such as Eurozone shares, decrease as a result of economic uncertainty, assets considered a ‘safe haven’, such as gold, or UK government bonds, increase.
Interestingly, UK property is the strongest asset class, at 47 per cent, but recent events have also caused investor sentiment here to decline, dropping 8 percentage points over the same time period.
The only asset class to see a marginal rise in investor sentiment over this time is UK government bonds, with an increase of 0.4 per cent.
Key economic factors that could affect the UK economy for the remainder of 2015
• Interest rates
The question remains: will interest rates rise? Deflationary pressures remain an intrinsic problem. Coupled with lacklustre productivity levels, it seems that a potential UK interest rate hike is far beyond the horizon.
• Debt levels
The UK’s debt levels are still rising, due, in part, to Government spending. It remains to be seen if the Government will be successful in implementing a robust solution.
• Bank stress tests
Global risks will weigh heavily on banks’ ability to pass Bank of England stress tests, the results of which will be published later this year.
• EU Referendum
The possibility of an EU Referendum for the UK is still up in the air, but remains a factor for consideration.
Key economic factors that could affect the Eurozone economy for the remainder of 2015.
Greece actually leaving the euro would accelerate uncertainty in the region, but Greece’s fate would continue to be under scrutiny even if it succeeds to formalise the new bailout package.
• Other General Elections
General Elections in other Eurozone states this year – such as Portugal and Spain – may affect the Eurozone economy on the whole. Any concessions made by the ECB in Greece could set a precedent for Spain’s own debt negotiations.
Economic performance continues to vary across the region. Germany, the Eurozone’s powerhouse, continues to lead the way and hold the bloc’s purse strings – while many other countries are still experiencing economic turmoil.
• Quantitative Easing (QE)
It remains to be seen if the ECB’s quantitative easing programme – which commenced in March – will have the desired effect of invigorating the Eurozone economy and battling deflation.
Should inflation levels improve, the Eurozone economy also has the potential to slip into stagflation if economic growth does not follow suit.
• Negative interest rates
Negative interest rates look set to hold firm in 2015.
April to June 2015 currency exchange rates – Sterling-US dollar
Month Average High Low
April £1.4918 £1.5380 £1.4628
May £1.5447 £1.5761 £1.5129
June £1.5561 £1.5873 £1.5245
July £1.5559 £1.5736 £1.5736
Year £1.5371 £1.5687 £1.5184
*Rates correct at 21 July 2015
US dollar enjoys its safe haven status It has generally been a positive quarter for the US economy, boosted by encouraging employment data. Events elsewhere in the world – particularly in Greece – drove up demand for the relative safe-haven US dollar. The International Monetary Fund (IMF) has cautioned that a strengthening dollar could add pressure to US growth, by affecting the country’s trade balance. This, coupled with US Federal Reserve Janet Yellen’s promise of slow, gradual rises in interest rates, could mean that a significant rate hike is further away than previously anticipated.
Key economic factors that could affect the US economy for the remainder of 2015
Although US unemployment has fallen, it remains to be seen if it will reach levels deemed sufficient to encourage an interest rate hike. Although the US Federal Reserve does not use one economic indicator to guide a potential increase in the interest rate, the unemployment level has been historically an important one, and should be watched with interest.
• Interest rates
Although the US economy is outperforming those of its major peers, a number of factors still rein the central bank in from attempting to increase interest rates too soon. Some commentators wonder if the US will be able to raise interest rates in 2015.
• Oil prices
Oil prices are yet to stabilise, prompting questions about US production.
Avoid the risks of currency volatility in uncertain times
With ongoing economic and political uncertainty in global markets, it is crucial to discuss with your advisor your current and future tax obligations and financial situation. It is also important to think about how political and economic events will affect any international transfers you need to make.
There are ways you can avoid the risk of currency fluctuations as a result of market uncertainty and geo-political developments. A good way to mitigate this risk is to plan ahead, setting an agreed exchange rate with a currency specialist and forward buying your currency for up to a year in advance by using a product called a Forward Contract.
If you are sending regular payments overseas, for bills, a mortgage or pension payments, you can also protect the exchange rate that you pay on these transfers from market volatility by setting up a regular payments plan, again making use of a Forward Contract to set the rate at a time when it is suitable for you.
For guidance on currency markets from the experts at Smart Currency Exchange, and help saving money and avoiding risk when making your international transfers, request a free account with Smart Currency Exchange online, or call the team on +44 (0) 20 7898 0541, quoting ‘The Fry Group’.
Please note that any dealings with Smart Currency Exchange will be subject to the company’s usual terms and conditions. This communication should not be regarded as a recommendation from The Fry Group that the Smart Currency Exchange service is suitable for you in the light of your personal circumstances. Any arrangement you make with Smart Currency Exchange are not communicated or agreed by The Fry Group, your relationship is directly with Smart Currency Exchange