Monday 18th February 2013
Good morning. The GBP/EUR rate continued its roller coaster ride last week, starting off at a relatively good level around 1.18, recovering after the European Central Bank president talked the Euro down (more on that shortly).
As you can see from the chart below, the recovery was short lived as the Bank of England followed suit and talked the Pound down. In today’s report we will look at what is causing the swings, explain what is moving exchange rates both in the UK and the Eurozone, and look at what may happen to the exchange rate in the coming weeks and months.
In this week’s Report:
- Central Banks risk engaging in ‘Currency War’
- BoE comments and Retail Sales weaken Sterling
- Pound/Euro forecast for next 6 months
- Round up of the week’s other data that may affect rates
Sterling vs. Euro;
This week’s moves can be attributed to 4 main areas – Bank of England Comments, UK data such as Retail Sales, EU growth figures, and the increasing danger of an all our ‘currency war. So let’s look at each area in a little bit more detail.
Bank of England weakens Sterling
The Pound weakened heavily on Wednesday, falling to the lowest level against the Euro in 15 months, after Bank of England governor Mervyn King delivered the latest inflation report. He said that risks to economic growth are to the downside, and that he expects inflation to rise over the year. His negative comments caused investors to sell the Pound, which was probably his intention as usually when he gives a speech he takes the opportunity to talk the Pound down.
So it seems increasingly likely that Sterling will continue to weaken, and his comments also suggest that the economy may well suffer a triple dip recession following the deep contraction at the end of last year.
In addition to the gloomy inflation report, UK retail sales fell unexpectedly in January, confounding economists’ expectations for a rise. The retail data raises concerns about the strength of the UK economy, which shrank by 0.3% in the fourth quarter of 2012. Some analysts had already feared that it could contract again in the first quarter of 2013, which would mean the UK would slip back into recession.
“This probably brings the question of ‘triple-dip’ back on the table again,” said Rob Wood, economist at Berenberg Bank. This caused the Pound to weaken further, wiping out all its gains over the previous week. This caused a sharp fall in the value of Sterling.
In other data last week, figures showed the Eurozone recession deepened in the final three months of 2012, official figures show. The economy of the 17 nations in the euro shrank by 0.6% in the fourth quarter, which was worse than forecast. It is the sharpest contraction since the beginning of 2009 and marks the first time the region failed to grow in any quarter during a calendar year. The GDP numbers sent the euro lower, pushing GBP/EUR rates up slightly, however the gains were not to last due to the Retail Sales numbers and UK economic outlook, as outlined above.
The recent strength of the euro has been a source of concern for France in particular. France has called for a target to be set to stop the single currency from becoming so strong that it damages the recovery. A high valuation makes exports more expensive and so it’s in countries interest to have a weak currency to try and spur investment. This has led to renewed talk of “currency wars” where countries compete to devalue their currencies to help boost exports. Let’s look at what this means in more detail.
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Finance ministers of the G20 group of nations have tried to dampen speculation of a currency war. The value of a country’s currency has a big impact on its trade and there are fears countries are trying to influence markets to help boost their economies. Indeed in the last few weeks we have seen both the European Central Bank & Bank of England use its press conferences as a platform to weaken their respective currencies.
The G7 group of nations issued a statement saying they would not set targets for exchange rates of their currencies. The head of the European Central Bank, Mario Draghi, attempted to dampen talk about currency wars ahead of the meeting, by saying loose talk about currencies was “inappropriate, fruitless and self-defeating”.
The meeting comes at a time when some of the world’s biggest economies and regions are still struggling to spur economic growth. A weak currency makes goods from a country, or region, cheaper to foreign buyers and also boosts profits of firms when they repatriate their foreign earnings back home.
What is said, however, and what may actually happen could be very different things indeed. We are now entering a very dangerous area, and as economies battle to weaken their currencies, it makes the currency markets very volatile indeed, and means we see rates move sharply and without warning.
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If you have currency needs this year, take stock of your options now
This year alone, a purchase of €250,000.00 has differed in cost by over £15,000.00, clearly illustrating how quickly things can change, and the impact it can have on any currency requirement.
For this reason, and the market uncertainty surrounding exchange rates at the moment, you should contact us today to discuss your currency requirements in detail. In having a free consultation, we can let you know what is happening in the market, so you can make an informed choice on when to purchase your currency, and what type of contract is best for you.
Weekly Economic Data that may affect exchange rates
Monday – Today’s UK data is House Price data from Rightmove. It’s relatively quiet today, with the only other data of note Vehicle Sales from Australia. The US is closed for President’s Day.
Tuesday – Nothing from the UK today and only minor data from Europe; Construction Output and an Economic Sentiment Survey. There are also housing figures from the USA, and Inflation data from New Zealand.
Wednesday – An important day for Sterling; we have the latest unemployment and earnings data. There are also the latest minutes from the Bank of England which may indicate whether more QE is on the cards. In the Eurozone we have German and French Inflation data, along with Industrial order numbers from Italy. In the USA we also have inflation numbers, and the latest FOMC minutes.
Thursday – The only UK data of note is Public Sector borrowing which is quite an important release. In the EU we have a raft of inflation numbers from Germany France and the EU as a whole. Over in the states we also have inflation figures, along with Jobless Claims and Home Sales.
Friday – Nothing from the UK today, but GBP/EUR could be affected by Euro data – we have German GDP and Trade Balance numbers, Italian Inflation figures and Retail Sales, and an EU wide measure of inflation. Nothing from the USA, and we end the week with Canadian Inflation numbers and Retail Sales.