Wednesday 7th December 2011
Good morning. It was a bit of a mixed day in the currency markets yesterday. Initially Sterling rose against both the Euro and US Dollar as Standard & Poor’s warned about a mass downgrade if EU leaders fail to act decisively. However good EU data and poor UK data reversed this trend, and Sterling exchange rates slipped throughout the afternoon. After the rate/chart snapshot, today we’ll look in detail at developments regarding the EU debt crisis, and what the future may hold for GBP/EUR rates.
• GBP/EUR 1.1616
• GBP/USD 1.5620
• GBP/AUD 1.5176
• GBP/NZD 1.9967
• GBP/CHF 1.4417
• GBP/CAD 1.5741
• GBP/ZAR 12.432
• GBP/JPY 121.27
• GBP/DKK 8.6335
• GBP/NOK 8.9512
• EUR/USD 1.3443
Standard and Poor’s in EU downgrade threat; weakens Euro
Initially yesterday, Sterling/Euro rates rose after Standard & Poor’s said it may carry out a mass credit downgrade of euro zone countries if EU leaders fail to move decisively on solving the region’s debt woes at this week’s summit. The ratings agency said the decision was prompted “by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole”.
Markets took this as Euro negative, and as a result GBP/EUR rates rose as the single currency became cheaper to purchase. The gains were very shortlived however, as the above charts illustrate. As we’ll see in a moment, poor UK data combined with better than expected figures from the EU caused Sterling rates to fall through the afternoon.
Sterling exchange rates fall on fundamental data
So why did exchange rates fall through the afternoon? It was due to much better than expected German industrial orders data, which was then compounded by weak UK retail sales and housing market surveys which highlighted the fragility of the UK economy.
German industrial orders rose by 5.2% in October, which was more than twice the amount forecast by analysts. As the figures were so good, it painted a better economic picture in the EU, and this is why the Euro gained strength throughout the afternoon.
It has eased concerns about the euro zone economy, and so yesterday mornings gains were very short lived indeed.
UK economic data also disappointed yesterday, pulling Sterling exchange rates lower as a survey showed the biggest drop in Retail Sales since May. This indicates a lack of consumer confidence and as a result Sterling fell against other currencies.
So what is the Pound/Euro forecast for December and for 2012?
In recent months, Sterling has been supported versus the euro in recent weeks by investors that are concerned about the EU, moving their funds out of Euros and into UK gilts, however this is unlikely to continue should the UK economic picture worsen.
Many currency analysts think that ongoing signs of weakness in the UK economy will put a dampener on the pound as a fragile economy will require the Bank of England to continue buying assets from the market, which involves flooding the market with the currency. If it were not for the problems in the EU, GBP/EUR rates would be significantly lower than they are.
If a consensus is reached this week in meetings between Germany and France, then we could see the Euro stabilise and gather strength. Coupled with a weakening pound, this could mean significantly lower exchange rates. If however problems in the EU continue, the Pound could remain supported against the Euro, but if there is more QE to come from the BoE, many question how long any support could last.
In short, much depends on any resolution to the EU debt crisis, as this has been driving exchange rates globally, and not just between Sterling and Euros. Whatever currency you need to buy or sell, this could have significant impacts on the exchange rate you’re able to achieve.
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