Pound
predicted to stabilise around 1.40 Euros
West
Crete Journal, March 2008
>Last July, the pound was worth €1.49. But following the sub-prime
lending and Northern Rock situation, it slid to its current value of
around €1.31. A property then costing €150,000 (£100,671)
would now effectively cost £114,503 - a rise of 13.7%.

currency graph courtesy of www.xe.com
However, the good news is that the euro's rise is likely to be trimmed
soon. Paul Mortimer-Lee, global head of market economics at BNP Paribas,
wrote on 29 February:
"I don’t think the markets have realised how
much trouble the eurozone is in. While investment is holding
up, consumer confidence is very weak. We expect a contraction
in GDP (gross domestic product) in the eurozone in the second
quarter and that ultimately the ECB (European Central Bank)
will be forced to cut.” |
According to BNP Paribas, that will mean that the ECB will have to
cut its key interest rate from the current 4% to 3.75% in June and
to 3.25% by the end of the year. The euro, on this basis, will drop
back to $1.40 by the middle of the year (currently $1.50). If that
prediction comes true, the pound will almost certainly rise against
the euro, and eventually stabilise at around €1.43.
On 8 March, Charles Purdy of Smart Currency Exchange confirmed that
this prediction looked likely:
"Sterling gained some ground against most currencies.
The Bank of England kept UK interest rates on hold which was
very much as the market expected. In February, UK consumer
confidence continued to fall but the UK services sector did
better than expected. This conflicting data highlights how
difficult a job the BOE has. Cuts in UK interest rates are
expected but timing will be the issue. The Euro sits at €1.311/£1
inter bank and is benefiting from the "benign" economic conditions
in Euro land. Economic conditions are probably not that benign,
just a lot better than elsewhere. The European Central Bank
kept € interest rates on hold last week, which was as
expected. The ECB also raised its forecast for inflation and
trimmed those for economic growth. However the ECB stressed
that it is mandated to ensure price stability, which has in
effect ruled out any short or medium term Euro interest rate
cuts." |
We believe that, after the small gains against the euro in the last
week, it looks like the pound reached it's lowest rate at €1.30,
from last year's high of €1.49 (see graph above). Logically, it
should stabilise somewhere in the middle, which would place it around €1.40.
That figure ties in fairly well with the predictions above.
"What can we do about it?", we hear clients say.
Firstly, we have already pointed out to sellers that the pound has
devalued, and they should not insist on price increases!
Secondly, if the experts are correct, it would seem best to wait a
while and see how the pound moves. If it moves upwards as predicted,
your sterling will buy more euros and should then hang on to it.
However if it starts slipping, the risk is that you won't be able to
buy enough euros for your favourite property in Crete. In that case,
we suggest you could hedge your bets by moving half your sterling funds
into a euro account (see example for £100,000 below). If the
pound later starts to climb, you will in theory have lost some of the
extra euros you don't have right now. However, all properties and construction
works here are priced in euros, and at least you will have bought enough
of them to fund your Crete escape!
|
|
Now |
Predicted |
Exchange rate |
1.20 |
1.30 |
1.40 |
|
|
|
|
€ value of £100,000 now |
|
130,000 |
|
|
|
|
|
Convert half now, half later |
|
|
|
€ value now |
|
65,000 |
|
€ value later |
60,000 |
65,000 |
70,000 |
Total € value |
125,000 |
130,000 |
135,000 |
Result € +/- |
-5,000 |
0 |
+5,000 |
|
|
|
|
Convert all later |
|
|
|
€ all later |
120,000 |
130,000 |
140,000 |
Result € +/- |
-10,000 |
0 |
+10,000 |
|