Hedging EUR/GBP – Macro Outlook

For international businesses year 2015 started with few concerns on the forex market. Volatility rised up pushing levels to prices records. Cash flow managers have certainly adapted their strategies to the New Year market. Once again for unprepared business managers the move of currencies will lower their PnL accounts. Since end of November 2014, EUR decreased by nearly 8% against GBP. Has your margin been impacted?

Compared to the rest of Europe, the UK economy has been showing higher growth rate (0.7% in Q3 and 0.5% in Q4 2014). On a yearly basis, the UK’s GDP increased by 2.7% which is far from growth of French economy (0.22%). In addition to uncertainty with Greece the ECB decided to expand the Quantitative Easing. These are the two main factors that lowered EUR against GBP.

Hedging EUR GBP

Hedging EUR GBP

However the UK inflation reached a record low, mainly because of falling energy prices (motor fuels). From 1% in November 2014 the annual inflation rate dropped to 0.5% in December. Even with low rates a strong currency will be difficult to cope with the Continent, a major business partner.

On a short term perspective a technical recovery by 2% of the EUR/GBP is one of our scenario. On a longer term we considere that the current levels are great opportunities to buy EUR / GBP, either at spot or with 3M / 6M forwards contracts.