European Property

Buyers and sellers of European property are reportedly holding off from making any transactions because of the continued uncertainty over the direction of the sterling/euro exchange rate.

There is almost an equal amount of evidence to support both currencies seeing increased strength in the near future. So it is understandable the both sides are waiting.

“A lot of investors are sitting tight at the moment as no one’s really certain what will happen,” says Tom Holian, a dealer at Foreign Currency Direct.

Last year the strength of sterling against the euro completely collapsed, and continued to fall. In the final quarter of last year it plumbed the depths of 1.00GBP/1.05EUR, and there was even talk of the two reaching parity with each other — this was averted when the UK successfully pulled out of recession.

Since then sterling has been slowly clawing its way back up, with 1.10 euros becoming the new ceiling as we progressed through the first quarter of this year. Sterling was helped immensely by the eurozone debt explosion in Greece, which weakened investors’ faith in the euro and sent sterling to the dizzy heights of 1.15 euros, with 1.13 being the new average.

This is where we hit the standoff. On the one hand you have the massive debt problems in the Eurozone, which continue to put downward pressure on the strength of the euro against all currencies except sterling. This is because, on the other hand you have the fact that the UK also has a massive budget deficit in need of spending cuts, and the massive uncertainty caused by the impending General Election.

The election could easily weaken sterling, in fact it is unlikely to strengthen it, whilst the Eurozone debt balloon still has a long story to tell, and sterling will likely strengthen during this.

A hung parliament is likely to spell weakness – though analysts at Foreign Currency Direct believe this is already in the price. However, both World First and Foreign Currency Direct think that sterling will strengthen later in the year against the euro.

Today the UK released its GDP figures for the first quarter, which show a 0.3% growth in the UK economy year-on-year, and a 0.7% growth over Q4 2009. Now we wait on Eurostat to reveal the EU’s first quarter results, to see what currency is going to really benefit here.

With all this uncertainty, it is understandable that people would rather wait and see before buying and selling property in Europe.

But given the circumstances, if the euro does have a run against sterling following the election, it is likely that there will be a rush on euro to sterling conversions, as people know that it is most likely to be a one-way street in favour of sterling for as long as it takes Europe’s debt issues to be resolved.