2012 forecast: Pound/Euro recovers to 22 month high

Thursday 3rd May 2012
Good morning. A fairly volatile week so far! The Pound fell earlier in the week when economic data was quite poor, signalling all is not rosy with the UK economy. However during trading yesterday, Sterling recovered well to hit a 22 month high against the Euro, and a 32 month high against a basket of major currencies.

In today’s post I’ll have a look at the latest data in detail, how it has affected exchange rates, and how the coming days data could have an effect on the cost of your currency conversion.


Pound falls earlier in the week

As stated above, the Pound fell back from the record highs we had seen recently, after some quite poor data was released. We had a manufacturing survey that highlighted the fragility of the UK economy, and also the risk that the strong Pound may dent exports also had an effect on the Pounds value.

The pound’s losses were quite short lived and limited though, as the currency is still seen as the best of a bad bunch. The Euro is having its own well publicised problems, the US has high unemployment and the chance of further monetary stimulus, and of course the recent numbers showing the UK is in recession may be revised up after last week’s unexpected contraction – all of this has helped the Pound recover.


EU data disappoints, pushing GBP/EUR back up

This week we have seen unemployment in the Eurozone reach a record high. For all 17 nations in the Eurozone the jobless rate rose again to 10.9%, the highest since the euro was formed in 1999.

In some rare good news from the EU, Greece has had its government debt rating raised out of default by credit rating agency Standard & Poor’s. The country goes to the polls for national elections on Sunday, and has been racked by continual street protests over its austerity cuts.

We also have the Dutch and French political uncertainty, which could mean we see new governments not as sympathetic to the austerity measures needed for EU bailout funds. This has caused concern among investors which has weakened the Euro pushing rates back up to a 22 month high.

Better UK data helps push up the Pound

We’ve had a run of decent data for the UK in the last few days. UK construction data exceeded expectations while the euro zone manufacturing sector contracted further and unemployment rose, highlighting the divergence between their economies. The markets seemed very pleased with the solid figures as a slump in construction output was one reason behind the economy’s contraction in the first quarter.

The construction data soothed some concerns about the fragility of the UK economy after manufacturing data disappointed on Tuesday, and raised expectations of a decent PMI reading from the dominant services sector on Thursday.

Furthermore, UK mortgage approvals and consumer credit data also came in above forecasts.
So in summary, the data has helped fuel safe-haven demand for the pound, which has rallied strongly against the Euro in recent months as investors diverted portfolio flows from the indebted euro zone to triple-A rated UK government bonds.

Indeed, Sterling has performed well since April’s Bank of England policy minutes dampened speculation of an increase in the bank’s 325 billion pound asset purchase programme. With its high levels of debt and strong trade links to a troubled euro zone, however, the UK economy remains shaky and more monetary easing remains a possibility. Analysts, however, said a sister PMI survey on the more dominant services sector, due on Thursday, could have a bigger impact on sterling if it came in on the weak side.

Summary for Pound/Euro forecast 2012

So lots to digest with regards to the UK and EU economies and this is what has been driving exchange rates this week. In short, if we keep getting strong UK data then the Pound will likely remain supported against the Euro at the current highs. If poor data comes in though we could see it dip.

I think the main thing that will affect GBP/EUR rates in the coming days however is the political situation in the EU – continued uncertainty could weaken the Euro and the potential is there for it to weaken further.


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