Sterling to Euro Prediction 2009

Sterling falls against Euro
Today marks the beginning of Quarter 3, and has started badly for the pound. Sterling rates for buying US Dollars hit an 8 month high, however against the Euro rates have fallen after gains were short lived following poor UK economic data.

Sterling had posted hefty gains during the second quarter due to escalating speculation that the deterioration in the UK economy seen from a year ago may have hit a bottom, and is showing some signs of improvement. This however appears not to be the cast, as we’ll see below.

Today we’ll look at GBP/USD and the state of UK house prices. Then we’ll have a look at the poor GDP data that’s caused rates to fall. Finally, a quick look at GBP/EUR forecasts, and then of course today’s data releases will be listed as usual.

Sterling (GBP) to US Dollar (USD)
Sterling hit an 8 month high against a much weaker dollar yesterday due to surprisingly strong house prices. Gains were trimmed however, after weak gross domestic product figures showed the economy continues to suffer here in the UK. Sterling initially rose more than 1 % on the day $1.6750, its highest since October last year. As mentioned, it was the Nationwide building society house price index that helped, showing that house prices rose 0.9 % in June when markets were actually expecting a fall. Let’s take a look at the house price data:

UK House Prices

The increase in prices during the past month means the average home now costs £156,442, which is £15,973 less than a year ago.

The Nationwide said the stabilisation of prices was a very welcome surprise, and as reguler readers will be aware, when data is better than forecast, it tends to strengthen the currency concerned.

Last week, HM Revenue & Customs reported that house sales in the UK had risen again in May to their highest level in 8 months.

The Bank of England also recently reported that the number of mortgages approved by lenders had risen for the fourth month in a row in May. This suggests that the revival in buying and selling seen this spring may continue into the summer.

This was taken very positively by the markets, and is what pushed rates to new highs against the dollar. As mentioned above however, further data showed the UK economy is still in contraction, and this is what caused the fall in a very volatile day’s trading yesterday:

UK Economy
The UK economy contracted 2.4% in the first quarter of 2009, a decline not exceeded in a staggering 51 years, according to the latest official data.

The decline was more severe than the earlier estimate of a 1.9% fall, and worse than analyst expectations. The ONS now says the recession began during the second quarter of 2008 rather than during July to September, so that the recession has now been running for a whole year.

Shadow chancellor George Osborne said the GDP figures showed that the recession had “been longer and deeper than we had thought ……. This also means that in the future, unemployment will be higher and Labour’s debt crisis will be even worse,” he said.

So, while the last few months had seen good gains for the pound, this latest data casts a shadow over the optimism, and I now expect markets to be more cautious, and further GDP data is due at the end of July that will give a clearer picture on when the economy may recoever.

Todays Data
We have already had German Retail sales data, which was much better than expected. This has strengthened the Euro and pushed rates into the 1.16’s. For the UK shortly we have Manufacturing PMI. This captures business conditions in the manufacturing sector. As the manufacturing sector dominates a large part of total GDP, the Manufacturing PMI is an important indicator of business conditions and the overall economic condition in UK.

Later on this afternoon we have a host of data from the US, including Home Sales, Unemployment, Crude Oil Stocks and mortgage applications.

It’s important to note that even if your requirement isn’t for US Dollars, data from the states can have a big effect on the value of all major currencies. Demand by investors and speculators to buy and sell the dollar is currently driving broader currency movements and affecting Sterling, Euro, Aussie and Kiwi Dollar.

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