Dollar Strength, Sterling Strength & Euro Weakness

Those who have been following my blog will already be in the know about my opinions on the U.S Dollar over the past few months.

We saw the GBPUSD exchange rate reach highs of 1.71-1.72 just only a few months ago, now when we look at the markets, it is a completely different story.

Firstly, the main reason why we have seen the Dollar gain so much strength over the past few months is due to the "Tapering" of QE in the USA, For those who don't know what this means, Allow me to fill you in;

The USA announced a programme five years ago that they named "QE with a twist", this generally meant that they would be printing money,(devaluing their currency) and giving to the banks so this money could be lent, they would also buy bonds with this extra cash. This of course put significant weakness into the U.S Dollar as this meant that they would essentially be getting into debt with themselves as an economy.

Last year we saw Ben Bernanke announce a plan to begin tapering the QE monthly, essentially trimming down the amount they were printing to eventually go to zero- In a year we saw the U.S taper their amounts of printing from 80 Billion USD a month down to 10 Billion USD a month in September. This week it was announced by Janet Yellen that after 5 years, and printing over $4.5 Trillion over the past 5 years, that the QE programme has now ended.

This means that the U.S is now functioning without any borrowed money, and shows massive strength in their economy, which is why we now have seen the GBPUSD exchange rate dip below the 1.60 area.

The next move for the USA will be an interest rate hike, which is not due until 2015, as they are now waiting for certain levels on employment and inflation (Without the help of QE) so they can put their interest rates up effectively and continue to grow their economy.

So now you can see why the U.S Dollar has gained so much strength, I guess the next question on your minds is why the GBPEUR exchange rate has now gone from 1.26 up to 1.2750 over the last 2 days.

First of all, we know that Europe have cut their interest rate, and their bank deposit rates twice this year- due to their all time low on inflation. These measures were taken in order to start increasing inflation again, force the banks to lend, so consumers could buy again, they were trying to create a demand so consumers could spend and hopefully inflation could creep back up- Alas, this didn't seem to do the trick.

Mario Draghi has since announced that he will be looking to pump around a Trillion Euros into the economy through a QE bond buying programme- and this started last week with their first purchase of Bonds over 1.7 Billion, however for this to be effective, they may need to speed up the process.

We have also seen weak inflation figures from Germany last week, this also was a blow to the EUR exchange rates; Germany is the main producer in Europe, and makes up for roughly 40% of the European Economy, so it is safe to say, if Germany is suffering, so is everyone else.

For clients who are looking to purchase with the following currency pairs- GBPEUR, GBPUSD, EURUSD, Please see below for expectations running up to the end of 2014.

GBPEUR- 1.26-1.29

GBPUSD- 1.55-1.61

EURUSD- 1.23-1.26

If you would like analysis for your personal situation, then please don't hesitate to contact me directly via email or telephone-

Prem.Raja@currencies4you.com

01322 319 550 (Direct Line)