Sterling/Euro lower after deal. Outlook/Forecast

Friday 28th October 2011
Good morning. Sterling hit a 7 week high yesterday after the EU rescue deal, but fell sharply against the Euro. The EU agreement bolstered market sentiment, strengthening the Euro significantly against the Pound, and it also buoying equities and perceived riskier currencies such as Sterling. At 08:30am this morning rates are as follows:

GBP/EUR 1.1349
GBP/USD 1.6076
GBP/AUD 1.5065
GBP/NZD 1.9651
GBP/CHF 1.3882
GBP/CAD 1.5946
GBP/ZAR 12.4197
GBP/JPY 121.87
GBP/DKK 8.4467
GBP/NOK 8.7084
• EUR/USD 1.4161

EU rescue deal strengthens the Euro

In negotiations in Brussels on Wednesday, euro zone leaders struck a deal for private banks and insurers to accept a 50% loss on their Greek government bonds, and agreed to beef up the region’s rescue fund by €1 trillion. Yesterday this had a significant effects on exchange rates, with big swings for major currency pairs.

The Euro gained strength as the markets seemed to like the deal. This pushed GBP/EUR rates quite a bit lower in the mid €1.13’s. The news also strengthened riskier currencies such as Sterling. As a result the Pound was up slightly against the US Dollar.

Safe haven currencies like the Dollar weakened, as market sentiment increased and investors moved away from the safe haven US Dollar. This pushed GBP/USD rates to a 7 week high briefly breaking the $1.61 barrier.

“The fact that EU leaders, who have disappointed on so many occasions before, have agreed a framework and avoided a disorderly, involuntary Greek default has been taken by the market as a positive,” said Gavin Friend, currency strategist at nabCapital

Risks to Sterling remain

Earlier this month the BoE embarked on a second round of quantitative easing to try and boost growth. QE involves flooding the market with pounds which is seen as a negative for the currency as it dampens demand. A Confederation of British Industry distributive trades survey on Thursday showed the decline in UK retail sales eased off in October, although the underlying trend remained weak.

It also followed a survey on Wednesday showing British factory orders fell at their fastest pace in a year in October, which stoked fears the economy may tip back into recession.

However, some analysts said despite a weak UK economic outlook sterling would remain supported against the dollar due to the fact further QE in the UK has already been announced, while speculation over more monetary easing from the U.S. Federal Reserve has picked up in recent weeks.

Today’s Data

A quiet end to the week with no data of note from the UK or EU. Most data is US based including inflation data and consumer sentiment information.

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