Weekly Sterling/Euro FX rate forecast

Monday 12th October
Good morning everybody. As always for Monday mornings, today I’m going to take a detailed look at Pound/Euro rates, where they have moved and what the forecast is for the coming weeks. In a nutshell, rates have been falling and are expected to continue to do so.

In this week’s Report:

  • Sterling weakens on chance of more QE
  • Pound/Euro falls to new lows in the €1.23’s
  • Pound/Dollar remains in the $1.60’s
  • Round up of the week’s other data that may affect rates

Sterling vs. Euro;

In an interesting week for the GBP/EUR cross the Pound broadly lost ground against the Euro as the frailties of the UK economy once again made headline news. Euro purchasers were on the back foot right from that start of the week as Sterling breached 3 week lows against the Euro following further expectation for more quantitative easing. This was triggered by the UK Chancellor George Osborne during his speech at the conservative party conference when he said that the bulk of savings in his budget would be through cutting government spending. This in turn would add pressure on the Bank of England to ease monetary policy perhaps as early as next month.

The week remained tough for the Pound following Christine Lagarde’s speech when she said that it was the IMF’s view that Britain’s economy would contract 0.4% this year, before growing by just 1.1% in 2013. This is some way off previous predictions in July, when it suggested 0.2%t growth in 2012 and 1.4% growth the year after. This continued to put pressure on the Pound and also adds more fuel to the argument that the UK could lose its prized AAA credit rating.

Although the implications for the UK economy were ominous, the effect on the GBPEUR cross were somewhat limited as she discussed the on-going pressures on the rest of the Eurozone, and also looked at revised growth forecasts in the context of the rest of the world. In particular she warned that that austerity measure place on Greece need to be eased and they should be given an extra 2 years to repay their debts in the light of the fact that they very nearly defaulted recently.

World leaders warning over UK growth

There is an increasing call from financial leaders such as Legarde to restore growth to pull the world out of recession and not let Austerity curb this. This was touched on by the outgoing head of the FSA ‘Lord Turner’ in his speech on Thursday night at Mansion house when he commented that QE may not be working as well as perhaps it did when the program was first started and that there may need to be radical changes within the banking and finance system for these problems to be overcome.

Lord Turner’s speech was particularly scrutinised as he is widely expected to be named as the next Governor of the Bank of England when Mervin King steps down next year, and therefore anything he says now is analysed for clues on how he may approach the new role should he get the position. He called for “a willingness to employ more innovative and unconventional policies” and although he didn’t expand on this point it is understood that he believes the  Bank of England should considers telling the Treasury that it doesn’t have to repay the £375 Billion that it achieved through QE.

This type of policy is loosely termed as the creation of ‘helicopter’ money due to the imagery of just throwing money on everyone out of a helicopter. The idea being that the cash injection stimulates the economy without burdening it with painful austerity repayments.  As one of the leading candidates, his speech or ‘preliminary interview’ for the role caused a stir but also showed that he is open to perhaps more radical solutions for how to guide the British economy out of the lingering financial crisis.

All of this doesn’t bode well for the Pound, as more QE and further measures would likely weaken Sterling, while the Euro continues to pull the other way due to its well published problems.

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Weekly Economic Data that may affect exchange rates

Monday The only UK data the markets will react to today is yesterday evenings RIghtmove House Prices. There are no EU releases either. In the USA we have Retail Sales, Manufacturing data and a speech by the FED. In New Zealand we have inflation numbers that could dictate interest rates. 

Tuesday We get going with UK data today including Inflation data, Housing prices and Retail Sales. In the Eurozone we have inflation numbers and Trade balance figures at 10am. Also in Europe Germane releases an economic sentiment survey, of importance as Germany is the largest EU economy. Over in the USA we have more inflation numbers and industrial production figures.

Wednesday An important day for the UK, as we have the latest Bank of England minutes, showing the vote and discussion of the recent MPC decision. In addition, UK Earnings and unemployment numbers are released. Some minor EU construction numbers are released, in addition to US Mortgage applications and building permits.

Thursday An EU Extraordinary meeting starts today, which will see EU leaders meet and discuss the current problems in the Eurozone. This could throw up some surprises so expect Euro volatility today. In the UK the only data of note is retail sales, a good barometer of overall economic activity. Stateside we have jobless claims and the Philly Fed Survey.

Friday The EU Extraordinary summit continues today. Staying in Europe we have inflation number and industrial production figures. In the UK we have the latest Public Sector borrowing numbers. We then end the week with Home Sales from the United States.

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