Pound/Euro & Pound/US Dollar Forecast 2010

Pound vs Euro
The single currency struggled to make any gains over a generally weak pound last week as news from Greece continued to grab the headlines. The Greek economy, which has struggled since the recent downgrade in its sovereign credit rating, has now began to have a major affect across the entire Euro zone as fears of its high debt levels loom.

With other countries such as Portugal, Spain, Italy and Ireland also in high levels of debt, small cracks have begun to show in the Euro for the first time since its introduction. The outcome for Greece now suggests a bailout from a larger EU nation such as Germany or an exit from the Euro all together.

By Wednesday investors looked towards the UK as the Bank of England unveiled a dovish report in which the UK inflation outlook was revised down, increasing the possibility of further quantitative easing. The QE scheme which in simplistic terms involves pumping more money into the UK economy is more than likely to weaken the pound and drive down GBP/EUR rates.

BoE Governor Mervyn King said it was far too soon to say QE was finish, leading analysts to believe concerns over the UK economy would continue to hamper sentiment towards sterling in the longer-term. As a result Thursday’s rate saw a 3 week high in favour of Euro and highlighted the fragility of the pound.

However, any minor gains were short lived as all attention turned back towards the Euro zone and the lack of detail over the problems facing the Greek economy. Consequently GBP/EUR moved steadily back towards the 1.15 barrier only to break through by Friday lunchtime as news filtered through that a bailout would have to wait. German Chancellor Angela Merkel stated that any bailout procedure would not be exercised until March time at the earliest. As a result GBP/EUR peaked to 1.1517.

With both currencies weak and the market particularly volatile it may be worth discussing the possibility of a forward contract with your FCG Account Manager. This will allow you to lock in to a rate for up to two years in advance and safeguard you from any losses. Finally, with only a 0.3% difference in debt levels between the UK and Greece, widespread speculation has began hinting that the UK could find itself in a similar situation, suggesting it may be important for those purchasing Euros not to become complacent with the recent turn in GBP/EUR rates.

Pound vs US Dollar
During a week of volatile trade, Sterling rebounded toward the end of last week from the 8-month low it hit against the dollar on Monday (1.5535), trade closed on Friday after GBP/USD hit 1.5697.

The contributing factors to Sterling’s volatility resulted from the Bank of England report on Wednesday which revised down the UK inflation outlook, increasing the possibility of an expansion of its quantitative easing programme to pump cash into the economy. The government debt levels currently plaguing not just the UK but also Europe and of course investor risk appetite which had faltered and sterling declined against the dollar after China moved to cool its economy, fueling speculation the global recovery may stall resulting in demand for the safe haven status of the US Dollar to the detriment of Sterling.

The week ahead promises as much volatility as the last however the U.S. will be closed for trade on Monday as it marks Presidents Day. The must watch economic releases amongst others both take place on Wednesday with the BoE (Bank of England) Meeting minutes and the FOMC (Federal Open Market Committee) meeting minutes, the news will indicate the intentions of the committee and the fiscal policies which could result in similar volatility to last week.

FCG can help limit your exposure in the Foreign Exchange markets using various contracts such as Limits, Stops and forward contracts, so if you have a requirement to exchange currencies and also do not wish to gamble your hard earned cash contact us today discuss you individual requirements in more detail.

This Weeks Data
For the UK, the main data will be the Bank of England minutes. The minutes of the BoE MPC meetings are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. Last week we saw the BoE make very dovish comments on UK recovery, and so markets will watch for further negative comment that may weaken the pound. We also have House Prices and retail sales, which act as an economic barometer.

In the EU, data aside markets will be closely watching developments with the Greek bailout situation that has significantly weakened the Euro already. This will be the main driver, but there are also figures released regarding Trade Balance and consumer confidence.

Today is a market holiday in the states. For the rest of the week, we have FOMC minutes that determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. We also have producer prices and inflationary measures. The dollar has been strengthening due to its safe haven status, and further good data from the states will compound this and drive GBPUSD rates down.

Monday
US – Market Holiday
UK – House Prices
Jap – Producer Prices

Tuesday
Aus – RBA Minutes
UK – Consumer Price index
UK – Retail Sales
UK – House Prices
Ger – Economic Sentiment

Wednesday
UK – Bank of England Minutes
UK – Unemployment
UK – Jobless Claims
EU – Trade Balance
US – Housing Data
US – FOMC Minutes

Thursday
Jap – Interest Rate Decision
Swi – Trade Balance
UK – Public Sector Borrowing
EU – Consumer Confidence
US – Producer Prices

Friday
Ger – Producer Price Index
UK – Retail Sales


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