As sterling sunk to a record low against the euro this week, foreign exchange specialist Moneycorp warned the trade that the situation could worsen before it gets better.
The pound was registering at €1.24 as freshinfo went to press. Edward King, a foreign exchange dealer at Moneycorp’s Knightsbridge office, told freshinfo: “The pound has weakened by 17 per cent against the euro in the last 12 months, and that comes straight off the bottom line of UK importers. The obvious response is that firms try to renegotiate existing contracts and prices - which is inflationary.
“It is all part of the credit crunch,” he said. “The Bank of England interest rate dropped again last week, by a quarter per cent to five per cent, and foreign investors are wary of putting their money into a market where there is perceived instability.”
Interest rates in Europe are actually lower, but the general perception is that the market on the continent is more stable. “The general feeling is that the pound will weaken even more in the coming months, maybe as low as €1.16,” said King. “How this changes will depend on the European Central Bank (ECB), which is expected to cut its interest rates in the autumn or winter, after which the euro would inevitably fall.
The US dollar has recovered a little from its own low against sterling, and its performance in the next few months will have a bearing on the pound:euro equation. “The dollar has basically been weakening for seven years now,” said King. “It has come down from the $2 to the pound mark, to around $1.96, and that could drop further, which will impact on decision making in Europe.”
So what should fresh produce traders be doing to mitigate against the market fluctuation? “At this point, we are recommending to our clients that it is prudent to protect yourself against the potential fall to €1.20 or lower, by taking out forward contracts to hedge against that risk,” said King. “But the guidance is not to go too far ahead, as things should hopefully begin to improve if and when the ECB cuts its rates later in the year.”
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