Carl Hasty, head of trading at Smart Currency Business looks at the prospects for the euro/sterling relationship in 2012.
One of the more unedifying aspects of the ongoing euro crisis was when members of the French government recently decided to take a few pot-shots at the UK economy. As relations at diplomatic level turned increasingly sour around the turn of the year, French finance minister Francois Baroin told a European radio station, "the economic situation in Britain today is very worrying, and you'd rather be French than British in economic terms."
While there can no question that jibes such as this help nobody, they do raise an interesting question: which country is better placed right now – France or the UK? Moreover, is the UK in a stronger position than its neighbours in the euro zone? The answer to this question does, of course, have huge implications for the euro/sterling relationship, a relationship UK importers will be watching closely in the coming months.
Against sterling, the euro weakened at one stage in January to €1.2165/£1 - its lowest level for over a year. It’s not difficult to make a case for a further weakening of the euro in the coming months. Watching events unfolding in Greece, where rioters have taken to the streets at the prospect of further austerity measures, it’s easy to see why there is considerable nervousness around this increasingly beleaguered currency. If Greece were the euro zone’s only weak link, the currency might hold strong. The concern, however, is that events in Greece will be replicated in the likes of Italy, Spain, Portugal and even Ireland.
One word characterises the whole situation: uncertainty. We are in unchartered territory, the euro as a currency never having had to withstand anything remotely like the pressures it is currently under since its conception in 1999. As such, we wouldn’t expect any significant appreciation for the euro against most currencies in the short term unless the currency it is being paired with suddenly develops significant problems of its own.
Why, then, is euro/sterling not something more like €1.40/£1 or maybe even €1.50/£1? The short answer to this is that the fundamentals that underpin sterling as a currency aren’t looking particularly rosy either. Government debt in the UK is now a whopping £1 trillion and a double-dip recession looks a 50-50 bet.
So there is no certainty in where to next for the euro/sterling exchange rate. Further weakening of the euro against sterling is a decent bet in 2012 as problems in the euro zone continue to play out. There was a similar sentiment expressed at the start of 2011 and it is worth noting that a lot of the year was spent with sterling below €1.15/£1.
Therefore timing can be critical when buying euros. It has to be remembered that there could be a long period between placing your order and actually paying your invoice. This will expose you to significant risk and possible losses on your purchases if the euro did appreciate. This can be avoided by using a forward contract. It may sound complicated but is very straightforward and would ensure that you fixed the price for euros well in advance. In fact you can do it as soon as you place your order.
If you are convinced that the euro is going to weaken against sterling I would always suggest buying half of your required euros using a forward contract. This way, the pain of the totally unexpected happening will be less, and you could still have some upside if the euro did weaken.
We update our views on the euro/sterling exchange rate on a daily basis. If you would like to discuss please get in touch. We also produce on a monthly basis our 'Outlook' report which pulls together our thoughts and those of the mainstream banks on where to next for exchange rates. It's always interesting to see what the experts are thinking. Download your copy now or call us on 020 7898 0500 to discuss your situation.
