Volatility the order of the day in currency markets

The Pound has been up and down like a yo-yo against the Euro this week, complicating life for British buyers in Spain. Foreign currency exchange specialist Luke Trevail looks at the factors driving exchange rates, and what the future might hold.

The currency markets have hurtled into the New Year with an unceremonious crash as Sterling gave up the gains it enjoyed last year against the Euro in just 4 weeks.

From trading at €1.44 at the end of November, we touched a low of €1.28 in January. Forecasts remain uncertain as 2016 is developing into perhaps the most volatile year since 2008. Those of you that need to cover a requirement to buy euros are certainly in a good position to protect yourself from the threat of further decline. Trading at €1.30 or above should now be your target as the dangled carrot of €1.40+ has been swallowed up by the greedy market donkey.

Understanding why the rate has moved down is a challenge. Often there doesn’t need to be a reason why a certain currency falls out of favour but the pound has become known as toxic over recent trading weeks. Fundamentals in the UK are fairly muted from a generally good 2015 and the Bank of England’s position on keeping interest rates on hold until perhaps the first quarter to 2017 does influence sterling to the negative.

Global pressures continue, however, to dominate all markets, with lower commodity prices, a collapse in the cost of a barrel of oil, and Chinese stock markets crashing all in the first few weeks of the new year. It’s this ‘dangerous cocktail’ of pressures that Chancellor George Osborne has warned may adversely affect the UK economy this year and has very much punched the pound in its soft under-belly.

Rates are incredibly volatile currently so anyone who wishes to dip their toe into the market should look at jumping in with two feet as the market doesn’t care much for nervousness and is moving second by second, but with the trend looking dangerously down so be warned!