Volatile times ahead for the Eurozone mean that FX hedging will be critical

GIVEN the deteriorating situation in the Eurozone – both political and economic – the outlook for euro-sterling has improved quite a lot in recent months for anyone looking to buys euros. As recently as October the pound dropped to €1.13. It currently trades around €1.20 – a gain of 6 per cent. We now feel the momentum is for moves higher in the medium term towards €1.25+. If the euro bounces back, which it did several times last year, we would expect good support for the pound above €1.15.

It appears the politicians have reached either crisis fatigue, political stalemate, or both. While closer fiscal integration agreed by the majority of EU member states in December was a positive – assuming they all sign the treaty once it’s written – it doesn’t deal with the immediate concern of Europe’s largest debtor nation: Italy. There simply isn’t enough money available in the existing bailout funds to provide loans to Italy were it to require assistance in the same way Greece, Portugal and Ireland did – Spain looks less of a concern recently but is also a risk.

It’s important to note at this point that while the pound has seen some buying interest due to the stability of the UK political situation and deficit reduction commitments, it’s a weaker euro that is really behind this move higher. The pound is lower against the majority of other currencies so far this year so consider the advantageous rates available in case the euro recovers. Timing is critical in such volatile markets and with so many variables – including further quantitative easing (QE) by the Bank of England.