Monday 2nd April 2012
Good morning. As always for a Monday morning, today I’ll take a detailed look at Pound/Euro rate movements over the last week, forecasts for exchange rates in the coming months, and how economic data releases this week may affect exchange rates.
In this week’s Report:
- UK Could be heading back into recession
- EU debt crisis keeps GBP/EUR supported
- Round up of the week’s data that may affect rates
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Sterling vs. Euro;
It was an interesting week for Sterling/Euro, in which we saw a raft of very poor UK data releases, but despite this, rates remained relatively stable and within the €1.19 to €1.20 range we have seen over the last few weeks. In this week’s GBP/EUR report we’ll take a look at the UK economy and why the Pound remains supported against the beleaguered single currency.
In a week in which the UK was bathed in unbroken sunshine, I’m afraid the sun was not shining on the UK economy. We had a raft of fairly alarming data releases suggesting the recovery in the UK is stalling.
Early last week saw Bank of England policymaker David Miles say that growth in the economy had effectively stalled, with growth rates near zero over the last six months. This keeps alive the slim chance of another round of quantitative easing, which usually weakens the Pound. The recent BoE minutes showed 2 members of the Bank of England’s rate setting committee voted for further stimulus, so there is an outside chance more QE could be announced soon.
This was followed on Wednesday by revised figures showing UK gross domestic product contracted by 0.3 % in the last 3 months of 2011, which was worse than the forecast for an unrevised 0.2% fall on the quarter. This was worse than the markets had been expecting and increases the chance of the UK heading back into recession. (2 consecutive quarters of negative growth is the technical definition of a recession.)With negative growth in the last quarter of 2012, the fear is that if we also see negative growth for the first three months of 2012, we will be in a double dip recession which would likely weaken the Pound.
These fears were supported on Thursday, and the downward revision was soon forgotten when the Organisation for Economic Co-operation and Development (OECD) has calculated that the UK economy has indeed contracted in the first three months of this year.
While this was just an estimate, it does cause concern as it came just days after Bank of England Governor Mervyn King warned the challenges facing the UK economy, and saying that Britain faces a long road back to economic growth.
So, with all the doom and gloom, poor growth figures and general pessimism surrounding the UK economy, you would usually expect the Pound to weaken against other currencies. In fact we saw the Pound remain supported against the Euro at just below the €1.20 level. So why was this?
Part of this was due to news that France’s GDF Suez offered £6 billion to buy UK energy company International Power. This strengthened the Pound due to the possibility it could prompt robust demand for sterling, giving the Pound some strength.
This was only part of the reason however, as having a biggest impact on the fact GBP/EUR rates didn’t fall is the EU debt crisis. Despite the concerns surrounding the UK, they pale into insignificance when compared to Europe’s problems. Spanish government bond yields rose yet again last week, while Italian credit default swaps also moved higher, reflecting investor worries that the EU debt crisis is on-going and that Greece may need further funds.
Although the actions by European policy makers helped stabilize the financial markets in the short term, the actions have been seen by many as simply putting off the inevitable, the best analogy being simply “kicking the can down the road” and this is what is keeping the Euro weak and GBP/EUR rates supported.
If you are worried about how the EU debt crisis could affect your currency purchase, you can:
Moving forwards the forecast for GBP/EUR is impossible to read. It’s being pulled down by very weak UK data, but being supported due to the debt crisis. If you need to buy or sell Euros you should have a free consultation with us on the possible outcomes, and tools you can use to protect yourself against adverse exchange rates movements.
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Weekly Economic Data that may affect exchange rates
Monday – There is no UK data released today. Of note in the EU however are some inflation numbers and unemployment figures. Stateside we will see 3pm releases including Construction data and manufacturing production.
Tuesday – Some interesting releases from Australia today including an Interest Rate decision, Retail Sales and the RBA policy statement. Closer to home we will see UK Construction data and the BRC Shop Price Index. The EU has further inflation numbers to follow yesterdays.
Wednesday – Staring in Australia again today, we see some Trade Balance figures that could affect GBP/AUD rates. In the UK there are PMI figures released, but of more importance will be the latest announcement on any Quantitative Easing. The EU also has an interest rate decision today, followed by a press conference. This often causes more volatility than the decision itself, so we will be watching it closely.
Thursday – Today is very important for the Pound, as we have a raft of UK data. Industrial Production, Manufacturing Production and an interest rate decision for the UK. Later in the day we have the NIESR GDP estimate. This is very important as it could signal the UK is heading back into recession. In the Eurozone there are also Industrial production figures from Germany.
Friday – EU and UK markets are closed for Good Friday. We do have some data from the states however – Unemployment, Non-Farm Payrolls & Consumer Credit.
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