Exchange rates are pivotal to the cost of foreign property, which means sending money abroad should be carefully planned, especially in volatile periods. Here, Charles Purdy, CEO of currency specialist Smart Currency Exchange, looks at recent currency movement.

Article written by Smart Currency Exchange 

Are you wondering why sterling has lost nearly three cents against the euro, the US dollar and other currencies since the start of October, and whether it could lose further value?

I often get feedback from expats advising me that the euro must be due a major fall, as the situation in so many parts of Europe is untenable? And to be honest, that isn’t an unreasonable starting point given the depth of the problems in the Eurozone. These include:

– Deflation is a possibility as inflation falls to 0.3 per cent.
– Recession could return to a number of Eurozone countries.
– Germany’s economy is stuttering.
– The European Central Bank (ECB) has intentions to weaken the euro, thereby making the Eurozone’s exports cheaper, which should encourage growth.
– Debt levels; for government, banking and individuals, these are still too high, thereby draining resources and holding back much needed investment.
– Structural changes to how individual ECB Member states operate, such as labour flexibility, is still outstanding.
– The ECB will need to start quantitative easing sometime soon, which will undermine the euro.
– The UK is likely to raise interest rates before they increase in the Eurozone.

All significant problems that need to be “worked through” and in many instances a stark contrast to what is happening in the UK, which is enjoying positive economic growth and falling unemployment. However, “no man is an island” and the UK has some key problems and interdependencies:

– Uncertainty over next May’s general election outcome given the UKIP’s recent by-election performance and the possibility of them becoming the power brokers in a hung parliament. This would increase the likelihood of an in/out vote on the UK’s membership of the European Union and we have just seen how the Scottish Independence vote unsettled markets.
– The Eurozone is the UK’s largest trading partner and as such we cannot avoid their pain totally.
– Inflation in the UK is also falling.
– There is a key resistance level close to the £1/€1.30 level and although logic would dictate this shouldn’t be a factor, currency markets sometimes consistently defy logic.
– Wage growth rates are insipid, which highlights there is still slack in the UK economy that needs to be overcome.
– We don’t have the strength of the German economy to help us.
– Debt levels in the UK are still significant.
– Interest rates are unlikely to be increased anytime soon.

So while the rhetoric is very much for further euro weakness, it shouldn’t be taken for granted. If the last few years have taught us anything it would be that we shouldn’t take at face value what market commentators postulate.

The euro may well weaken but the reality could be very different, especially if the political uncertainty in the UK begins to grow and markets begin to worry about the UK’s position in Europe, and if interest rate increases don’t actually happen. In six months’ time, could the euro be closer to 1.10 than 1.30 against sterling?

If you need to send euros, dollars or another currency abroad, soon or in the future, researching and planning your currency transfer with a specialist could save you a considerable amount of money. Minimising your exposure to currency exchange rate fluctuations would also bring peace of mind. To find out more, download Smart Currency Exchange’s free report or visit the Currency Zone.