Last week, we talked about how the Great British pound outperformed many global currencies. The reasons for this were the Bank of England’s announcement that it would ease quantitative easing, the results of the Scottish elections, and UK’s reopening agenda going to plan.
This week, despite some positive news surrounding the UK economy, the pound-to-euro exchange rate seems not to have moved much.
We’ll discuss it all here.
Going into the weekend, sterling is backed up by some optimistic figures. According to IHS Market PMI data, the UK economy is on track for a full recovery.
PMI stands for Purchasing Managers’ Index. It’s a qualitative analysis derived from a survey of business managers in a variety of sectors. These senior executives are asked about new orders, inventory levels, production, supplier deliveries, and employment.
It’s a good way to determine whether the economy is expanding, contracting or staying the same.
The results for May came good. Figures from the services industry PMI were just a couple of pips below expected. But the manufacturing PMI figures exceeded expectations.
This suggests two things…
One, the UK’s reopening plans have done good things to employment levels. This is backed up by the UK employment figures that came in on Monday, earlier in the week.
Unemployment was down to 4.8%, which was better than expected. However, this data could have been skewed by the fact that the UK’s furlough scheme is still up and running. When the scheme ends, we’ll have a more accurate picture of the employment rate. Any fallout that occurs will be clear and present in the data.
Two, demand has gone through the roof. The manufacturing PMI data has shown that new orders have increased alongside employment.
Why the increase in demand? The UK has been under on-and-off strict lockdown measures for over a year. For the people who were fortunate enough to continue to be in employment for the whole of the year, there was money to earn but nothing to spend it on.
This is what Bank of England economist Andy Haldane referred to as a ‘coiled spring’. In other words, lots of consumer demand, ready to be unleashed once society reopened.
We’re beginning to see the start of this. Now that people can spend money on going out to dinner, pubs, restaurants and on holiday (be it, mostly in the confines of the UK), business has started to boom again. Naturally, this has increased demand on the manufacturing industry.
A double-edged sword
So, the UK economy is apparently doing well… why isn’t this reflected in the pound-to-euro exchange rate? Indeed, GBP/EUR has stayed steady at around 1.16 (interbank rate).
The main reason for this is likely that the good news is already priced into the market. Or in simple terms, investors were expecting the positive news, so any gains that should have had an impact are already present in the exchange rate.
But there’s another variable that could also be weighing heavy on sterling. The PMI suggested that cost pressures were the most severe they’ve been for thirteen years.
This suggests that inflation — the overall increase of prices — is on the way. In fact, according to Martin Beck, Lead UK Economist at Oxford Economics, ‘The CPI [Consumer Price Index — a measure of prices] is likely to increase further later this year, boosted by the temporary cut in VAT for hospitality being partially reversed in September and some pass through from higher commodity prices and the impact of supply bottlenecks.’
It’s possible that this inflation may lead the Bank of England to increase interest rates. This is a go-to solution to calm down inflation. Higher interest rates can mean people are more likely to keep money in the bank than to spend it.
An increase in interest rates could be a boost to the value of sterling. If the cost of borrowing swells, then this could encourage foreign investors to put money into the UK, as they’d get more bang for their buck, so to speak. As a side effect, this could increase demand for GBP and increase its value.
What does all this mean for me as a British expat?
If there’s anything to take from this article, it’s that nobody really knows where the pound-to-euro exchange rate will go. For now, it’s staying relatively stable. But if the UK economy continues to boom, then the pound could strengthen against its counterparts. Alternatively, if the full force of inflation is unleashed, then it could weaken against the euro.
Who knows? We have some idea. Privalgo is made up of currency experts. If you’re moving money from the UK to Portugal, either to buy property or simply to live, then we can help shine some light on the tumultuousness of the currency markets.
We’re Privalgo — specialists in foreign exchange. We are authorised by the Financial Conduct Authority (FCA) as an Electronic Money Institution. (Reference number: 900887)
Through leading exchange rates, zero fees and innovative solutions, we help Brits save money and time when they move to Portugal. Get in touch today to see how we can help you build a rewarding foreign exchange strategy.