The Euro over the next month to six weeks could have a double whammy consecutively. Today the entire Forex market is expecting and aligned for a 0.25% interest rate rise from the Federal Reserve, which will take interest rates in the US to 0.375%. While the Euro has broken the $1.10 mark this week. Ultimately this is due to the ECB surprising the markets two weeks ago and the Forex market being unprepared to make any drastic movements before today’s meeting.
What happened the last time the Fed moved rates?
What we know from the past 35 years is that the first 250 days are the most volatile. Followed by a period, where the markets return to gains which were usual during a period of normalising interest rates.
Miscalculations from Investment Banks
Recently Goldman Sach released statements outlining that the investment bank miscalculated the relationship of the Euro and US Dollar. This was mainly due to the entire market miss-reading Mario Draghi comments regarding how far he would go for the Euro. As a result this is why the Euro has regained the $1.10 position against the US Dollar.
Goldman Sachs new expectations for Euro parity
Recently Goldman released a statement which outlined that they expect the Euro to hit parity with the Dollar by the end of 2016. It is very difficult to disagree with this view because the European Central Bank has extended quantitative easing until March of 2017. Thus the ECB has played its card, additionally the central bank expects inflation to reach 1.6% in 2017 which is constantly being downgraded.
Currently news websites are writing about monetary divergence between the ECB and Federal Reserve. In essence this means that both central banks are on different ends of the spectrum. Ultimately it is very difficult to see how over the short term, the Euro can with hold moving towards parity. Higher interest rates increase the demand for a currency thus making it more valuable. While quantitative easing increases money supply thus reducing the value of a currency. It is this inverse relationship which will be played out over the Forex market for the next twelve to eighteen months.
Timing of Interest Rate rises
To understand the reaction of the Euro, we need to watch for any indication regarding the pace of interest rate rises after the initial rise. The majority of voting members within the Federal Open Market Committee have referred to the markets over reacting regarding the initial interest rate rise. Instead the markets need to focus on the trajectory and speed at which additional interest rate rise will occur.
As a result of Fed chair members, most notably Fed President Janet Yellen have consistently referred to the speed of interest rate increases. We expect the markets to react to the initial rise but also to any indication of when the next rate rise could be expected.
Currently the next interest rate rise is expected for between April to July 2016.
The Second Whammy for the Euro
January is a very turbulent time for the Euro, especially as multinational companies acquire all their currency requirements within the first month of the year. For the past nine of ten years, the Euro has ended January lower than what it started the year with.
Unfortunately for smaller companies this creates a major problem regarding cash flow at the start of the year.
What can I do?
For businesses of any size, a Variable Flexible Spot Contract (or Flexi) is the perfect way to protect against the fall in the Euro. A Flexi books in a rate today which will cover your foreign exchange requirements for the next six to twelve months.
[button link=”https://www.transfermate.com/chat” newwindow=”yes”] Chat to use about using a Flexi[/button]
As a result, you can enjoy the luxury of planning ahead, being able to predict your cash flow and not worry about having to predict what the markets will do when the next big economic release is approaching. An interest case to help you decide how it can go drastically wrong, is Diageo throughout 2015.
TransferMate throughout every week, update our news section with current events. Keep an eye on this for anything that may concern your company and the major currencies on the Forex market.
Diageo’s currency woes during 2015
Earlier this year we wrote about how Diageo lost over 290 million pounds because the company incorrectly managed its currency use. for Diageo, 50% of all sales are within the emerging markets. throughout 2015, the emerging market currencies have been hammered by the Dollar and Pound. As a result, Diageo experienced a huge hole in its profitability. Don’t be another Diageo and call our currency specialists today.
If you have any questions, leave a comment below to extend the conversation.