Will the UK Pound Exchange Rate Rise Against the Euro in 2016?
Take note of the following questions:
Will UK interest rates rise in 2016?
Will the UK vote to stay in or leave the EU?
Is there really wage growth in the UK?
Is the oil price at a 12 year low?
Are UK consumers creating a new credit fueled boom?
All the above answers to the above questions affect the Pound to Euro exchange rate, so here's my input.
UK Interest rates
If interest rates rise the Pound will strengthen but my prediction is there will be no interest rate rises in 2016. However if inflation data shows that inflation is becoming a threat then I predict a .25% rate rise for the middle of this year.
UK In or Out Vote
Investors do not like uncertainty and it's for this reason the sooner this vote is out of the way the better. In the run up to the vote expect the Pound to weaken.
Update 03/04/2016 - Poll - Vote to leave leads by 4 percentage points ahead of Britain's EU referendum
This is a difficult one as yes there is wage growth but how many are benefiting from this in real terms? Many are part time and zero hour contract workers so a 3% rise in salary isn't going to fuel a spending spree and therefore an interest rate hike. The problem as I see it is the vast majority need wage growth just to survive and pay the higher rents asked for from the private landlords. I very much doubt that wage growth in itself will fuel inflation requiring an increase in interest rates to correct this, so no change for the strength of the Pound against the Euro there.
Low Oil Prices
Low oil prices feed into lower inflation and with 70% drop in crude prices since mid July 2014 the UK has seen some very low inflation figures recently. As inflation data follows a 12 month cycle its expected that as cheap food falls out of the calculation the UK inflation rate should creep back to around 1.3% by the end of 2016 .
Update 12/02/2016 - Oil prices rise 12% on hopes of Opec nations set to cut production.
Update 03/042016 - Oil prices rose 6% in the first three months of this year
Update 18/04/2016 - Oil prices dive after producers fail to agree output cap
Possible UK Credit Boom
Data shows that overall debt is falling in the UK but in November of 2015 use of credit cards and unsecured loans grew at its strongest pace since 2008. If this credit use boom fuels inflation then interest rates could rise strengthening the Pound.
To conclude I expect the Pound / Euro rate to be very volatile for the first half of this year followed by a flat rate of exchange to end 2016 of around 1.35 . Mind you, if a complete unforeseen financial horror story comes out the Euro zone or the UK, my prediction will be worthless.
Pound to Euro Interbank Currency Exchange Rate Trend for the Last Three Months
Real time 2016 events as they happen
Jan 2016 Bank of England votes 8-1 too hold rates at 0.5%
February 2016 - Bank of England votes 9-0 to keep interest rates on hold.
10 /02/2016 - Telegraph - Markets rule out UK interest rate rise until end of the decade and predict there is a 50% chance the Bank of England will CUT rates this year.
11/02/2016 - The Bank of England lowers its 2016 economic forecast by 0.3% from 2.5% growth to 2.2%
March 2016 - Bank of England maintains Bank Rate at 0.5% and the size of the Asset Purchase Programme at £375 billion
April 2016 - Bank of England holds interest rates at 0.5 per cent and steps up its warnings on the UK leaving the EU
May 2016 - Bank of England votes unanimously to keep interest rates at 0.5%.
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