Pound/Euro hits 3 year high above €1.24 – why?

Tuesday 9th May 2012
Good morning. Pound/Euro rates are at a 3 year high after the weekends French, Italian and Greek elections caused significant political uncertainty, weakening the Euro and pushing rates to €1.24+; the best buying levels in 3 years, amid widespread discontent with the austerity drive.

In today’s post I will have a detailed look at the effect of the elections on the Pound/Euro exchange rate, and the forecast for where Sterling/Euro rates may go in the coming months.

Elections in Europe weaken Euro significantly

Over the weekend we saw elections in France, Italy and Greece. The results plunged the Eurozone into a fresh crisis, as the new and potential governments have cast doubt on the durability of austerity plans aimed at tackling the euro zone debt crisis. When UK markets opened this morning, the GBP/EUR rate surged to a 3 year high. Let’s have a detailed look at each country in turn, and why the rate has gone up.

French Elections/effect on exchange rates

Mr Hollande won Sunday’s election in part due to his hostility towards the excessive focus on austerity pursued by his predecessor and Mrs Merkel. For Europe this is a momentous event. For a long time the centre right has held the stage; now a socialist has won and European politics will feel the shudder.

The truth is that if France is to bring its budget deficit down to 3% by 2013 then 18bn euros of cuts will have to be found next year. How that will be done did not receive much attention during the campaign. Hollande has promised to make growth rather than austerity his priority. In saying this he challenges the German prescription for solving the eurozone crisis.

He simply does not believe that austerity first is working. His first official meeting after he is sworn in will be with German Chancellor Angela Merkel – she has already written to the newly elected French President saying “necessary decisions” must be taken to resolve the debt crisis.

Mrs Merkel said she was sure the co-operation between the two countries would “continue to strengthen”. She has resisted calls from Francois Hollande to renegotiate a European pact requiring government budget cuts. A meeting of EU leaders has also been scheduled to discuss the pro-growth reforms preferred by Mr Hollande.

Greek Elections/effect on exchange rates

The leader of Greece’s left-wing Syriza bloc has said he will try to form a coalition based on tearing up the terms of the EU/IMF bailout deal. Alexis Tsipras, whose bloc came second in Sunday’s vote, said Greek voters had “clearly nullified the loan agreement”. He has three days to reach a coalition deal and has told the two major parties to end their support for the austerity terms if they want to take part.

Again like in France, this severely dents the progress made over the last year in Europe, with markets now very wary over future EU bailouts.

Italian Elections/effect on exchange rates

Centre-left and protest parties have made gains in Italy’s local elections, amid widespread discontent with the government’s austerity drive. The centre-right People of Freedom (PDL) party of former Prime Minister Silvio Berlusconi did particularly badly, with most votes counted.

Why have the elections pushed the GBP/EUR exchange rate up?

It’s because of the fact is has cast doubt on the durability of austerity plans, aimed at tackling the euro zone debt crisis. The EU has been plunged back into crisis with Italy, France and Greece assuming with new leaders they can ignore the necessary cuts and start spending again. Spain and Portugal will then assume if those countries don’t pursue austerity, why should they?

Things could get a little worse if politicians in Greece fail to form a new government, and this has left questions over the country’s ability to avert bankruptcy and stick with the common currency. Also, the eurozone is widely expected to return to recession this year, with some blaming spending cuts and tax rises by national governments, particularly those of southern Europe who are struggling to get their borrowing back under control. Unemployment in the eurozone rose to 10.9% in March. In Spain it rose above 24%, while the youth unemployment rate is greater than 50%.

Pound/Euro exchange rate now at 3 year high

All of the above has pushed Sterling to Euro rates to their best in 3 years, which is great news for anybody that needs to buy Euros at the current rate. If you want to take advantage of the current rate, get in touch today.

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Will the Pound continue to gain? GBP/EUR forecast May June 2012

It’s quite remarkable the Pound is so strong, despite the UK being back in recession! In the coming weeks, GDP figures will be revised though, so it’s likely markets are waiting for this. For the time being however, the Pound is seen as a safe haven alternative to the Euro.

Indeed the Pound may also come under pressure if debt contagion and economic slowdown in the euro zone started to affect the UK economy and fuel speculation the Bank of England could extend its asset purchase programme to boost growth. It’s important to remember that the UK and EU are trading partners, so any continued issues in the Eurozone could have a knock on effect on the Pound.

Most analysts still seem to be forecasting continued gains for the Pound, and given the information currently available I would agree. Of course, it’s impossible to predict exchange rates and with economic surprises coming from all quarters at the moment, while it is likely Pound/Euro rates may climb further, it’s not a given.

A ‘Stop Loss’ order is useful in this kind of market. This is where you can instruct us to convert your currency if it falls below a pre-agreed level, for example 1.21. You can then continue to take advantage of any further gains should rates climb, but if things move against you there is a safety net – a very useful tool when the market is moving in a favourable direction. These type of orders are available for transactions £10k and above – find out more now.

Pound falls against US Dollar

To demonstrate this, we saw GBP/USD rates fall over the weekend. This is partly due to the uncertainty in Europe causing flow back to the safe haven US Dollar, but it also shows that Sterling is not exactly a powerhouse – it’s simply stronger than the beleaguered single currency.

Getting the best exchange rates

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