Overseas Real Estate Blog

I know many buyers are watching currencies on a daily basis. Please see market report from IFX just in. o avoid currency risk think about fixing upfront or buy in Egypt where most of our property is quoted and contracted in UK Pounds.

Yesterday, stirling rallied, before slipping away from a relatively buoyant dollar to its lowest rate in the last 3 months after release of inflation data shows signs that a jump in British consumer prices is going to cause the Bank of England more headaches over the next few months.

British consumer prices surged 0.8 percent in April from March, far exceeding expectations for a 0.5 percent rise, and taking annual inflation to 3.0 percent, way above the central bank’s ideal rate of 2.0

Initially, with the consumer price index coming in higher than ideal the markets felt that this would stem of any chance of the Bank of England reducing interest rates, causing sterling to rise in value briefly against a number of currencies.

However sentiment changed during the session and opinion is now that the inflation risks alone would not stop the central bank from cutting rates, which would erode the pound's yield appeal.

The pound was also hurt by data released on Monday showing the weakest British housing price balance in 30 years. Falling retail sales, and a warning that British builders' financial results are being hit by the weak housing sector also stuck the knife in.

Traders and analysts are interested to see exactly how the Bank of England plans to reduce inflation. Historically high inflation hits economies that are experiencing high consumer confidence, low borrowing costs, and a generally feel good tone on the high streets. This sounds good but left unattended eventually leads to economic melt down where prices spiral upwards and borrowing increases to dangerous levels.

The usual way to combat inflation is to increase borrowing costs, by increasing interest rates, the net result being consumers and industry has less spare money and puts a tighter control on spending. To remain saleable product prices have to remain stable and inflation falls.

However, the situation the Bank of England finds itself in is one with high inflation and an economy that will not withstand increased borrowing costs. Inflation has been driven up by rising fuel and foods costs, the consumer has been spending more out of necessity rather than greed, being hit with higher borrowing costs will leave the majority feeling the pinch.

"The issue for sterling is that inflation is high, but the BoE can't hike," said Bilal Hafeez, global head of forex strategy at Deutsche Bank.

In an effort to fend off recession the BoE has already slashed borrowing costs by 75 basis points since December to 5 percent, and it was widely expected to drop another 25bp either in May or June. Rates remained the same in May heightening speculation they would be reduced in June but some analysts said that yesterday’s data raised the possibility that a cut next month may not be a done deal and the nest drop may not be until August.

You may see mini trends appearing over the next few weeks with groups of investors opting to invest in sterling whilst others sit in the wings and spectate. This may lead to a roller coaster ride for GBP/EUR and GBP/USD rates, your IFX consultant will be able to explain how you can protect yourself against fluctuations until things settle down.