Euro vs Pound: how can I hedge my bets?

Sunday, August 04, 2013

Euro vs Pound: how can I hedge my bets?

Alastair Archold of Foremost Currency looks at what's been happening to the pound (the short version!), the outlook and how we tackle it...

Sterling hasn't fared well this year, having already fallen 8 per cent against the euro. Those buying property overseas are keen to know if rates will fall further, or recover. This is of course totally unpredictable, but what we can do is look at the case for each scenario, and in doing so help you make an informed choice on what to do.

What could cause the rate to recover?

Although the pound has been weakening, some believe the biggest falls may now be behind us. Sterling had been fairly stable in the last few weeks, and the pound could benefit from a shift in perceptions of sovereign credit risk in the UK compared to elsewhere. The threat from a potential divergence in the unconventional monetary policies of the Bank of England and its European counterpart is perhaps also overstated.

We may not see the UK economy shrink, and any good news may boost sterling slightly. There is also the issues resurfacing in Europe, and if the debt crisis becomes centre focus again, the euro could weaken pushing GBP/EUR rates back up.

The case for exchange rates falling further

The UK economy is in decline, and the Bank of England will likely pursue Quantitative Easing (QE) this year, which in the past has weakened sterling significantly. The UK's credit rating is also under threat due to the real possibility we could enter a triple-dip recession. There is also the uncertainty over our future in the EU. All of this points to further clouds on the horizon for the pound and could mean rates continue to fall towards parity.

How can I protect my investment in Europe from more peaks and troughs for sterling/euro?

As the chart below shows, the cost of a €250,000.00 property has differed by over £20,000 in the last six months alone. If buying property abroad in this uncertain climate, a popular option is a "forward contract", which allows you to fix exchange rates today for up to two years, only lodging 10 per cent of your total initially.

Another strategy is to hedge your bets; if you need €250,000 you can fix a rate now on half your requirement (€125,000). Should rates recover you can then secure the remainder at a better level. If however rates decline further, in already securing a portion of your requirement you have halved your exposure. This strategy gives you some level of protection regardless where exchange rates move.

Cost of €250k property over the last 5 years

Get help with foreign exchange when buying a property abroad

A Place in the Sun Live is a great place to start your journey to owning a home abroad. As well as over 150 property agents and developers showcasing properties for sale, A Place in the Sun Live features a number of foreign exchange specialists who can offer advice and great rates on your currency exchanges when buying a property abroad.

The show takes place the NEC Birmingham on 27th-29th September. Tickets are on sale now at two for £15. Click here to book.


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