Pound Euro Forecast

The markets re-opened on Tuesday after the long Easter weekend to Gordon Brown’s announcement to fix the date of the general election for the 6th May. GBP/EUR immediately came under major influence from the opinion polls, not in favour of a particular party, but in speculation of either party achieving a strong majority.

Due to the British first-past-the-post electoral system, if neither party can obtain a strong enough majority the outcome results in a Hung Parliament. It’s feared that this scenario will result in a Government that lacks the power to take the tough actions needed to tackle the UK’s mounting debt problems and ultimately provide a strong enough platform for Sterling to make any long-term gains.

Although the polls generally showed a mixed outcome, those showing a Conservative majority had the greatest influence and GBP/EUR steadily moved through the 1.13 barrier further encouraged by reoccurring concerns over the Greek economy.

By Thursday morning the opinion polls began to take a negative effect on Sterling and investors looked ahead to two of the week’s most influential data releases, UK Industrial Output and House Pricing Index. Industrial output rose 1.0 percent on the month in February, reversing a 0.5 percent fall in January. Output rose twice as fast as expected in February and posted its biggest monthly rise since September.

Likewise the House Pricing Index showed a general rise in the value of UK housing and as a result GBP/EUR climbed to a 7 week high. Finally Thursday also saw the Bank of England keep interest rates on hold at 0.5% and freeze its asset purchasing scheme as expected.

Looking ahead it is likely that Sterling will come under further political influence and suggested that it may weaken as the election draws nearer. If you are looking to buy Euros you can safeguard your rate of exchange from any adverse movement and take advantage of today’s highs by locking in to a rate of exchange for up to two years into the future through a Forward Contract.

However, with the saga in Greece continuing to threaten the Euro and the latest batch of UK data possibly marking a turning point for the UK economy, those selling Euros should consider the possible threat that Sterling may continue to make gains.

This Weeks Data
Below is a breakdown of the main data releases for each this week. Do be aware that political uncertainty will probably have the biggest impact , as there are fears that the general election may result in a ‘hung parliament’ where no one party has an overall majority, and this is casting doubts over whether there would be any agreement to cut Britain’s record Budget deficit.

Investors are worried that a hung Parliament could struggle to push through a plan to repair the country’s finances, which would have a negative effect on the pound. As a result, Sterling has been moving on the whim of opinion polls. When one poll suggests an outright victory for the Conservatives, Sterling strengthens. When a different poll suggests a Labour victory or a hung parliament, Sterling weakens. This has caused volatile swings in exchange rates as polls are published.

There was not much data today; however this evening there is house price information for the UK. Today’s main news was that the euro has jumped sharply against the dollar and the pound after the Eurozone agreed details of a multi-billion euro loan package to debt-ridden Greece. This has caused GBP/EUR rates to fall from a 7 week high.

For the UK and US today we have Trade Balance which is a balance between exports and imports of total goods and services. A positive value shows trade surplus, while a negative value shows trade deficit. It is an event that generates some volatility for exchange rates.
For the EU, inflation data from Germany, plus continued fall out from Greece’s’ bailout will be the main focus. We also have Retail Sales for New Zealand.

Apart from industrial Production from the EU, today is US focused. Inflation data, retail sales and a speech by the FED chairman are the main events. The dollar has been strengthening of late; further good data will compound this and may cause a drop in rates.

Following Trade Balance data from the UK and US earlier in the week, today is the EU’s turn. There is also a monthly report from the EU, and some jobless data from the USA.

Again mostly EU focused today. We have various measures of the Consumer Price index. This captures the changes in the price of goods and services, and the CPI is a significant way to measure changes in purchasing trends and inflation in the Euro Zone. As such it can affect GBP/EUR rates.

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