Tuesday 28th August 2012
Good morning. Today I’ll take my usual retrospective view on what caused the Pound/Euro rates to drop away, and the events in the coming weeks that will dictate the direction of exchange rates and the Pound Sterling forecast in the coming months.
In this week’s Report:
- Pound/Euro rates decline as ECB poised to take action
- UK Economy didn’t shrink as much as thought
- Pound/Dollar rates hit 3 month high on QE threat
- Round up of the week’s other data that may affect rates
Sterling vs. Euro;
Last week we saw the single currency strengthen significantly, causing the pound euro rate to drop away. Trading opened Monday morning around the 1.2760 mark and steadily dropped throughout the week closing on Friday afternoon around 1.2630 as the graph below shows. In this week’s report we will look at the causes as to why the Euro has reached a two week high against Sterling, and what the coming weeks and months may have in store for the GBP/EUR rate.
Last week’s trading opened with sterling holding firm in the mid 1.27’s, relatively close to the best rates in 4 years. As is often the case though, spikes such as this are usually short lived. The great exchange rates didn’t last long, as expectation grew within the markets that the ECB will take action to ease Spanish and Italian borrowing costs.
The renewed expectations of some progress on the debt crisis saw investors pre-empting the ECB’s next move, and resulted in investors moving their funds from the safe haven of the Greenback and back into the single currency, giving it strength and pulling the exchange rate down. The possibility of ECB action came in tandem with the news that public net borrowing in the UK has increased unexpectedly, in a time where the UK government is continuing to make cuts, weakening the Pound.
It’s not all bad news!
There was some good news for the UK however on Friday, when figures showed that the UK economy shrank by less than previously thought between April and June. Revised data from the Office for National Statistics (ONS) show the economy contracted by 0.5% during the quarter, less than the 0.7% it announced last month. It didn’t have much of an effect on rates however, as many economists had expected the figures to show a smaller contraction and so for the most part, this was already priced in to rates, and was overshadowed by events in the Eurozone.
So what next for the Euro?
After a summer lull, the euro zone faces two months that will go a long way to dictate whether its debt crisis, now into a third year, will spiral out of control or finally be contained. The ECB appear to have temporarily stopped the rot and are now looking towards fast effective austerity measures.
In the next few weeks, we will see ECB inspectors travel to Athens to assess its debt cutting targets. There is also an ECB meeting where Mario Draghi will try to garner support for the Central Banks plan to bail out struggling economies, the ECOFIN meeting in Cyprus will see EU finance ministers thrash out plans to help Spain and Italy, and Spain will conduct an audit of its banks to see how much of the available bailout funds it will need. So, the future of the GBP/EUR rate hinges on what results from the above events.
What you can do if you need to buy or sell Euros.
With so much uncertainty over what will happen in the EU, the exchange rate could move significantly in either direction in the coming weeks. Due to this, many clients are choosing to remove any risk from the market and lock into a Forward Contract. This enables you to fix today’s exchange rates for up to 2 years into the future, allowing you to budget effectively, protecting against adverse exchange rate movements, and most of all give you peace of mind in a volatile and confusing market.
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Weekly Economic Data that may affect exchange rates
Monday – UK Markets were closed for Bank Holiday, but there were some numbers from Germany showing Import Prices and Business Climate expectations. In a quiet market the figures had little effect on exchange rates.
Tuesday – UK Markets reopen but there are no data releases of note. In the Eurozone we will see German Retail Sales and Consumer Confidence, in Spain the latest GDP numbers are released. In the United States we will see Consumer Confidence and a Manufacturing Survey.
Wednesday – Relatively busy today. In the Eurozone we’ll see German Inflation Data, Italian Retail Sales and Consumer Confidence, Greek Inflation numbers and French Business Climate assessment. In the USA the Fed’s Beige Book looks at the current economic satiation, in addition to GDP numbers released at 13:30pm.
Thursday – In the UK today we have Mortgage Approvals, measures of Consumer Credit and Consumer confidence numbers. In the Eurozone we see German Employment figures, Consumer Confidence numbers from Spain and the whole EU, and EU wide measures of Consumer Confidence, Industrial Confidence and Economic sentiment. Stateside sees Jobless Claims.
Friday – A quiet end to the week. Spanish and Greek Retail Sales, Italian Unemployment and inflation numbers, EU Consumer Price Index. In the USA we have a Speech by the FED chairman and a measure of consumer sentiment.
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