Tuesday 16th April 2013
Good morning. Rates remain fairly stable, with GBP/EUR rates only moving around 1 cent over the course of the last week. This are not likely to remain this way for long however, with some important data due to be released over the next few weeks.
In today’s report, I’ll have a look at the latest economic data releases, and the forecast for where Sterling exchange rates may move in the coming weeks.
Sterling remains stable against other currencies
The latest inflation numbers this morning came in as expected at 2.8%. The Bank of England has said it expects inflation to exceed 3% later this year. As the numbers were as forecast, there wasn’t much effect on exchange rates. In the longer term, the Bank had said it expects inflation to remain above its 2% target until early 2016.
The inflation outlook has prompted caution among policymakers about the increasing use of stimulus to kick-start the UK economy. The Bank’s Monetary Policy Committee (MPC) split 6-3 last month against restarting its asset purchase programme.
In effect, it is the Bank of England creating money to pump in to the economy. In the past this has significantly weakened the Pound. Tomorrow (Wednesday) we will see the latest Bank of England minutes showing how many voted for QE this time round, and if a 4th member has joined the calls for stimulus then expect the Pound to fall.
I think that the direction of Sterling will primarily be driven by the GDP numbers out on the 25th of this month. What is GDP? Again, a very concise explanation is available here on the BBC website.
In the final quarter of last year, the UK economy contracted at 0.3% and a second contraction in a row would mean that the UK is officially back in recession. The fact that the Bank of England haven’t ruled out the need for more QE, coupled with an estimate of only 0.1% growth, means investors are still pretty nervous about the state of the economy and are therefore refraining from buying into Sterling. This is stopping any gains in the rate and keeping things stable.
Euro remains weak
Less than a month after securing a bailout at the last minute, Cyprus is now under pressure to secure an additional 6 billion EUR worth of funds. According to the Debt Sustainability Report conducted by the European Commission and the ECB, the cost of the EU-IMF bailout has surged from the agreed upon 17.5 billion EUR to 23 billion EUR.
Apparently, the number crunchers at the European Commission have concluded that Cyprus has to increase its contribution to the bailout in order to compensate for the potential economic slump that would result from the current austerity measures. At this rate, the total cost of the bailout will now exceed the size of the Cypriot economy. Worrying.
As a country with a enormous debt and a rapidly deteriorating economy, Cyprus has few options left in terms of getting money to pay off its debts. A few market players believe that Cyprus would inevitably need a second bailout while some are considering the possibility that depositors with more than 100,000 EUR at the Bank of Cyprus would lose at least 60% of their holdings.
This in addition to fears other countries may have to follow the same path is keeping the Euro weak.
So are rates going to rise, or fall?
As I often point out here on my blog, it’s impossible to predict which way rates will move. Nobody can say where rates will be a week, a month, or a year from now. What I can do is explain what is moving the rate, and coupled with forecasts help you decide when to fix your exchange rate.
Sterling had weakened significantly early this year, before recovering in the last few months due to better economic figures and the problems in Cyprus. If UK figures continue to be relatively good and we avoid recession, then I would expect rates to continue to rise above 1.20 as the year progresses
If however it is confirmed that the economy is in recession later this month, then expect the Pound to plummet bringing exchange rates down. The on-going developments in Europe are also a major driver of rates at the moment, so we’re also keeping a close eye on what is happening in terms of bailouts.
So all in all due to the uncertainty over UK GDP figures, things really are on a knife edge and could move significantly either way.
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