Under the influence but perhaps not the influence you expect

news: Under the influence but perhaps not the influence you expect

MANY OF the factors moving the sterling – euro exchange rate are plain to see and easy to identify once you master the issues of cause and effect. However, there are external influences that are less obvious but equally forceful, it is these factors that will tend to catch out the unwary.

It is clear that the euro has recovered slightly from the unexpected news that the European Central Bank has woken up and may raise interest rates by the spring of 2006. This will end a two year stalemate and should provide the euro with some buying interest from yield hungry international investors. However, their enthusiasm may be tempered by the ongoing wrangle in Germany where, although Angela Merkel is the new Chancellor; her influence is severely diminished by the sparsity of allies in the new ‘grand coalition’ cabinet.

On the UK side of things, sterling has been unsettled by the growing expectation that the Bank of England (BOE) will leave the UK interest rate alone for now but may lower the base rate before the spring. These concerns are understandable with UK economic growth slowing to 1.5 per cent or less, a slowing housing market and stalling retail activity. However, UK inflation is up at 2.4 per cent and could yet push a little higher. This puts it well above the BOE’s 2.0 per cent target and, whilst energy prices are the major influence, the BOE’s only remit is to manage inflation and so they will have to start thinking about interests rate rises if inflation gets anywhere near their 3.0 per cent embarrassment level. It is at this point that the Governor, Mervyn King, has to write an open letter to Gordon Brown explaining their failure.

As compelling as these arguments are, the real driver of the GBPEUR exchange rate is a combination of external factors.The US dollar is definitely driving the currency markets, aided and abetted by a strengthening US economy which appears to have shrugged off the Katrina and Rita damage but is not out of the hurricane season yet. The hurricane influence is also seen in the oil price, which has hit 70 dollars per barrel and caused UK petrol stations to add the extra digit to pumps and signs in preparation for the one pound litre.

Such a high oil price will hamper growth and increase costs for both manufacturers and distributors. The silver lining to this oil cloud is that the Canadian dollar is at its strongest level in 11 years against the pound and in 13 years against the US dollar. However, the CAD is also strong because Canadian interest rates are on the rise; drawing investment funds into the Canadian economy in the quest for higher yields.

This interest rate story is having a major influence elsewhere as well. Some of the worlds strongest currencies are supported because their base interest rate is so attractive to external investors. Australia, New Zealand and South Africa are paying 5.5 per cent, 6.75 per cent and 7.0 per cent respectively. It is not surprising then that Japanese and European investors are keen to send their funds into these economies to gain compared to the 0 per cent and 2.0 per cent rates available in their respective home countries.

International merger and acquisition activity is also making its mark with US conglomerates buying into UK and EU companies causing massive volumes of sterling and euro buying and directly influencing traders’ exchange rate pricing.

All of these factors raise or lower your purchasing power when moving funds to or from Portugal and elsewhere. It pays to have timely information when making your currency exchange decisions and a specialist dealer is essential for the provision of the news and data that you need to avoid costly mistakes. The high street branches of clearing banks are simply not equipped to deliver the right information at the right time.

• David Johnson is a Currency Dealer with Halo Financial Ltd, delivering competitive exchange rates and a personalised service to help private clients throughout Europe save time, money and hassle on their foreign exchange.

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