The recent rise in the value of the Pound to Euro (GBPEUR) will be of keen interest to anyone planning a holiday to Europe in the near future but why are the exchange rates at the highest in over 7 years?
There are a number of factors that influence the exchange rates but the main factor driving the pound to new highs is down to Mark Carney’s statement on Interest Rates. Interest rates in the UK have been very low which many savers would be aware, however if they go up then more and more people will deposit money in the UK banks. Mr Carney announced that the Bank of England will raise rates much sooner than expected and just last night indicated that it could be at the end of this year. Of course if interest rates are higher in other countries then people might want to deposit their money there.
Aside from the knowledge that interest rates are due to increase, inflation is also playing a part. A higher inflation rate (compared to other countries) means that products in the UK cost more and so orders from over seas decrease. Forex traders expecting or seeing an increase in inflation tend to sell the currency, lowering the strenght of the pound. Just a few days ago the UK inflation rate fell to 0% and Mr Carney said that he expects inflation to remain low for at least the immediate short term rising around the turn of the year. A countries debt also plays a part with higher debt weakening the currency. Currently though the UK net borrowing as a percentage of GDP is decreasing and is expected to continue.
While there are other factors that drive exchange rates the good news is that the Pound to Euro exchange rate is in a good position right now and its expected to get better. Great news for UK holiday makers travelling to Europe.