Euro Gets A Pounding From Strong Sterling

Expats in Europe and the US are at the mercy of foreign currency exchange markets even though those paid from pensions or savings in the UK have had their spending power boosted over the past year or so.

The Pound is up more than 9% against the euro and 15% against the US dollar, making cash go further for expats in some of Britain’s favourite holiday and retirement destinations.

But how long the pound stays ahead is anyone’s guess.

The fortunes of the currency come down to the decisions made by three of the great and good – Janet Yellen, chair of the US Federal Reserve; Bank of England governor Mark Carney and European Central Bank chairman Mario Draghi.

For the most part, Yellen and Carney sing from the same song sheet. Both have hinted interest rates will rise as soon as the US and UK economies are considered strong enough to withstand the impact.

Politics drag Draghi down

Draghi is more unfortunate. He chairs a bank that looks after the interests of more than 20 nations and states using the euro, and is more of a ringmaster trying to tame the beast than a financial controller.

He has famously promised to do ‘whatever is necessary’ to save the single currency.

However, slow decision making, in-fighting and jockeying for position among the Eurozone nations means he often makes the right decisions too late.

As a result, the pound keeps strengthening against the euro because Carney has more control and a mandate to make decisions.

The likelihood is even if UK interest rates rise, the position against the euro will remain unaffected for the short term.

Euro expected to fall further

Forex experts expect UK interest rates to rise in the last quarter of 2014 or early in 2015 – and for the US dollar to follow suit as unemployment falls.

Despite these moves in the UK and US, the euro is expected to weaken in the short term while Draghi tries to get his ducks into order against a tough political headwind.

Now, the euro is worth about 80p and exchanges at around 1.25 euros. The margin is expected to lengthen to 1.29–1.30 euros by the end of 2014.

This would push the exchange rate down to around 77p, adding even more spending power to expat savings and pensions.

But, warn the forex experts, they should make hay while the sun shines because the position may not last for much longer once Draghi is more organised.

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