If you’re looking at exchanging your Pounds (GPB) to Euros (EUR), you’ll probably want to know how the outlook for 2015 is looking. We’re going to take you through the day to day swings, as well as a few longer term projections for the pound to Euro exchange rate.
Central Banks and Interest Rates
The European Central Bank (ECB), like the Federal Reserve in the United States, is the central bank that controls monetary policy for the European Union. Likewise, the Bank of England controls monetary policy (which alters the supply of money in circulation) for the UK. One of the big drivers of any currency are interest rates, which are set by these central banks. A high interest rate attracts foreign investors who are looking for high returns on their savings. This increases the demand for the respective currency, pushing up its value. Many experts believe that the UK will keep its interest rates low – due to high consumer debts (as higher interest rates would make people more likely to default on these) and the end of an economic boom, largely thanks to, now retiring, baby boomers. The main rate currently sits at around 0.5% and the bank seems adamant to keep this where it is. Overseas investors are unlikely to deposit in UK banks at such a small rate, which will keep demand for the GBP low, but still relatively high compared to the Euro. The ECB is currently keeping its main rate at around 0.05%, with no particular plans to change this either. However the ECB is currently continuing its “stimulus” package – which means that it’s buying bonds from people in order to increase the money supply. This increase in the supply of money leads to lower general interest rates in order to encourage spending and investment. A lower interest rate decreases foreign investors’ demand for the Euro, pushing its price down against the pound, although not substantially. This is likely to continue over 2015, possibly even heading into negative territory.
Inflation (Or more accurately, Deflation)
Inflation erodes the spending potential of money, causing investor confidence to dwindle. Thanks to falling oil prices and low interest rates, UK inflation is pegged at around -0.1%, while the ECB is quoting a similar figure for the Eurozone. As the inflation figure is negative, it’s actually not inflation at all – it’s deflation. This may sound good – after all, if inflation erodes the buying power of money, deflation must increase the value of money. This is true – deflation does increase the buying power of money. Unfortunately it also increases the real value of borrowed money – not only are borrowers paying interest on a loan, but the money that they borrowed is worth less than when they first received it. While this increases the chance that people will default on their loans and makes people reluctant to borrow money. This causes a slowdown in economic growth and can even lead to unemployment, driving down the respective currency along the way. While it’s unlike that 0.1% deflation will have drastic effects on the European and UK economies, there could be vast consequences if it is to continue. The ECB is attempting to combat deflation using quantitative easing (QE), where the bank buys bonds in order to increase the supply of money in the economy and inflate the value (which would combat the deflation). If this is successful, investor confidence in the Euro may increase, causing it to rise against the pound.
Greece, as part of the “Eurozone” is currently undergoing somewhat of a financial turmoil. Currently facing a €320 billion debt through overspending, Greece is currently facing a large risk of defaulting on their debt. Unfortunately, these creditors happen to be a large number of European banks (including those from Germany, France and Italy). A high risk of default means that the banks may lose their money – which depositors have invested into the system. If this were to happen, the system would be in crisis. There are talks that Greece may leave the Eurozone, otherwise known as a “Grexit” and adopt its old currency, giving the government more control over fiscal and monetary policy (this is usually handled by the ECB for the whole of the Eurozone). If this were to happen, European stocks would decrease in value, decreasing the demand and price of the Euro compared to the GBP. It’s important to note that, if Greece did exit the Eurozone, and prosper, it may cause people to lose faith in the idea of shared currency (the Euro). This is somewhat unlikely, but would cause drastic global changes if it did occur.
Spain and Portugal have elections approaching towards the end of the year. This gives rise to political instability – as traders are unsure what the outcome will be. It’s somewhat unclear as to what effect this will have on the Euro, but political stability is safe and leads to confident investors, and a potential resulting increase in the price of the Euro. The recent British election has appeared to have stabilised the GBP and another term of David Cameron’s centre-right conservative party will likely allow minimal political surprises in the UK. If you’re looking to send money between UK and the Eurozone, you’ll want to watch the currency trends to ensure that you get bang for your buck. OrbitRemit offers low cost, attractive exchange rate transfers between the Euro and GBP. Check out our calculator on the top right hand side of the screen to work out exactly how much will come out on the other side!