Pound/Euro falls: August 2012 forecast

Wednesday 1st August 2012
Good morning. Today I’ll give a quick mid-week update on what’s been happening in the currency markets in the run up to tomorrows policy decisions by the Bank of England (BoE) and European Central Bank (ECB), after we saw Sterling/Euro rates take a tumble throughout trading yesterday.

Pound/Euro rate falls on positivity from EU leaders

This week we have seen some robust comments from EU leaders that the EU debt crisis will be tackled, and this has strengthened the Euro and pulled exchange rates down. So what was said?

French President Mr Hollande said they agreed that the euro should be “defended, preserved and consolidated” and added there had been “significant progress” in recent weeks. Italy’s Prime Minister Mario Monti has said he sees “light at the end of the tunnel” on the eurozone debt crisis.

As well as his meeting with Mr Hollande, Mr Monti is also travelling to Finland and Spain, and he said he hoped his meetings would help “secure the euro and give a decisive boost to European growth”.

Over the weekend, a joint statement from Chancellor Angela Merkel and French President Francois Hollande was thought to indicate that Germany had softened its opposition to using the ECB and European bailout funds to buy government debt.

The comments have caused the Euro to strengthen and pull GBP/EUR rates down over a point yesterday as the graph below shows.

So what does it all mean?

These comments come amid speculation in recent days that European authorities are set to take action to lower borrowing costs for Spain and Italy. Tomorrow we have the BoE and ECB decisions on monetary policy. The ECB meeting is now expected to overshadow policy decisions by the Bank of England and the Federal Reserve after last week’s pledge by ECB President Mario Draghi to do “whatever it takes” to protect the euro.

If the ECB delivers credible measures, it could boost investor appetite for taking on risk, helping sterling against the dollar, but if it disappoints markets it could lead to sharp falls in the euro and other trades perceived as higher-risk.

So we all await what will happen on Thursday. Expect volatility in GBP/EUR rates – if the markets think action taken is good news, expect Pound/Euro to fall further. If however it’s just a case of them kicking the can further down the road, then I think rates will climb back up.

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