Foreign Currency Exchange

Last week saw the GBP/USD cross continue to deteriorate, dropping below the significant resistance point of 1.50 on Wednesday afternoon, despite starting the week at almost 1.59. We saw a low of 1.4550, before Asian trading showed some support for the Pound early on Monday morning, which continued up to the 1.50 mark, where we have seen a great deal of resistance as the mid-market struggles to break through.

Sterling fell to all time lows against the Euro last week as fears of recession in the UK mounted.

Responsibility for this seems to lay at the feet of Mervyn King, the governor of the Bank of England, who appeared reluctant to rule out the possibility of cutting interest rates further in a speech he made last Wednesday. Sterling weakness was compounded by the subsequent comments of Gordon Brown, who did little to protect the beleaguered currency.

The Pound’s recent performance against the Euro suggests that the market has priced in further rate cuts by the BOE, and the likelihood that these cuts will be more aggressive than those of their European counterparts.

We have seen Cable fall from a high last week of 1.6181 down to a low of 1.58 as a cut of 50-100 basis points in UK interest rates was factored in before the decision on Thursday. When the announcement was released we were surprised with a huge 150 basis point cut (from 4.5% down to 3.0%) which initially supported Sterling back towards 1.6 due to the positive effects it should have on the UK economy, but on Friday we saw it start to weaken off back to levels around 1.57. There will be hopes that this cut will help to stabilise conditions in the UK economy, and most importantly the housing sector, especially after we saw UK house prices fall further at the end of last week, and they now show a 13.7% drop in the last 12 months.

Last week’s financial news was dominated by Thursday’s shock announcement from the Bank of England of an unprecedented interest rate cut of 1.5% bringing the base rate down to 3%. With such a large rate cut, fears that the U.K economy is in dire straits were confirmed and investor confidence was further battered as the International Monetary Fund said that the U.K. would suffer the worst recession of all the major economies. After an initial brief resurgence in strength on Thursday as the market cheered the decisive rate cut by the BoE, the Pound then hovered just above record lows against the Euro. This Wednesday the central bank is scheduled to release its quarterly projections for growth and inflation and analysts expect that these will prove to be a grim reading for all, as the explanation behind the rate cuts are unveiled.

Last week risk aversion dominated all markets, and the demand for liquidity and security has sent panicked investors to the US dollar.

However, with the world’s largest economy wading slowly into a recession and interest rate speculation pointing to the lowest returns from US assets in history, how long can the greenback’s rally last?

Meanwhile GBP dipped below the 1.53 level against USD, and we may yet see Sterling looking to test Friday’s low of 1.5257 as U.K. Prime Minister Gordon Brown hinted at further easing with these comments “Inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the BoE, round the world to make a decision about interest rates. Speculation has increased that world leaders will use the Federal Reserve meeting this week as an opportunity to launch another coordinated rate cut.

Dollar strength! Now there’s something we haven’t said for a while. Last week was the strongest for the Greenback since early 2004 with EURUSD dropping from 1.5631 to 1.5050 this morning and lows of 1.4928, and Cable has dropped over 3% with a high last Monday of 1.9835, compared to a low early this morning of 1.9138.

The European Central Bank (ECB) raised interest rates yesterday from 4% to 4.25%, its first move since June 2007. The GBP/EUR Interbank rate fell to 1.2520 immediately after the announcement, just two cents over its all-time low.

Since the ECB is mandated to maintain price stability this decision came as little surprise. Data earlier this week showed that inflation in the Euro zone economy had reached an annual rate of 4%, double the upper limit of the central bank's target and the highest figure since records started in 1996.

Prior to the announcement the market had already fully factored in not only this move, but also a further interest rate hike to 4.5% by the year end. These expectations were dampened slightly in the later press conference, with ECB President Trichet noting the continued risks to economic growth and reinforcing expectations that the bank will not look to tighten policy further in the near term given the growth outlook.

The UK currency weakened to lows of around 1.25 against the Euro after the UK data, but regained ground following the ECB press conference. Increased unease over the European outlook will continue to provide some degree of protection to Sterling.

If you have ever exchanged currency you will know that rates fluctuate every second and the rate you see in the morning may not be the same rate later in the day. Many businesses, holiday makers and property buyers can feel left out in the cold when dealing with small currency exchanges and local banks. To save yourself time and money we have listed our top ten tips to save you from overpriced currency exchange.

1. If you know that you will be exchanging Sterling or another currency on a regular basis open an account with a foreign exchange specialist as they will obtain you better rates than you can find on the high street.
2. Make sure you do not pay to open an account with your foreign exchange specialist and understand that you are under no obligation to use it.
3. Whether for business or personal use, you can lock into exchange rates for up to 2 years into the future, helping with budgeting for either suppliers or property purchases.
4. Ensure you deal with a dedicated Account Manager, you don’t want to be listening to music on the telephone all day!
5. Make sure transactions are supported with a banking Receipt - Proof of Payment (POP)
6. You should not have to pay any fees or commissions with a foreign exchange specialist, again saving you money against the banks.
7. Transfer costs are cheaper than the banks. Generally speaking you will pay £20-£40 with a bank as opposed to £0-£20 with a foreign exchange specialist.
8. Take advantage of a Regular Payment Plan if sending money on a regular basis. Transfer costs will be cheaper and the rate will also be better than you will find elsewhere.
9. Transfers sent by a foreign currency specialist are sent via SWIFT, the quickest way of sending money in the currency markets. Thus ensuring your funds arrive quickly.
10. Using a foreign currency specialist means that you will have someone working for you, watching the markets and most of all, making sure you make the most of your money!

If you are looking to exchange large sums of money from pounds into euros over a broad timescale, as you would when buying your overseas property think about ways to get the best deal and protect your money against exchange rate fluctuations.

There are two ways of securing yourself the best exchange rate within your timescale:

1)     Buying Spot – The Spot Contract is the most basic and popular foreign exchange product. It is an agreement to buy or sell one currency in exchange for another. You have 2 days to settle the contract, at a price based on the prevailing "spot exchange rate" the current value of one currency compared to another.
Although the spot market lets you buy or sell currency as you need it, spot exchange rate movements are highly unpredictable, even during a single trading day. Upon receipt of cleared funds currency is available for onward transmission.
Or you may feel that you would like to leave what money you have in your domestic account to accumulate interest and only change your money just before the signing of contracts- this can be risky, however, as the Euro and pound fluctuate in value leaving the final price in pounds uncertain.

It is strange to find that purchasers of property in Europe are always keen to negotiate a good price on the house of their dreams, but then fail to appreciate that great savings can be made by ensuring that they receive the best exchange rate form Sterling to euros or visa versa. When buying abroad, you’ll usually have to pay a deposit, staged payments and/or the full purchase price. During this process, you’ll be required to convert your British Pounds to the currency of the country you’re buying in.

Since the exchange process is simply one tiny aspect of the entire transaction, many buyers fail to give it the attention it deserves and therefore make a fundamental mistake.

Most buyers understand that the price of currency fluctuates second by second, and they also realise that banks add on a 2-5% profit margin when selling the currency to you!

HOWEVER what many buyers do NOT realise is that there are ways to purchase currency at a much better rate, by buying at the right place and the right time. To save £1,000’s on your currency exchange and transfer charges; call a Currency Exchange Specialist, rather than using your high street bank!