Pound rises on Mervyn King comments

Friday 15th March 2013 

Good afternoon. Well, we have finally seen a turnaround for Sterling’s fortunes, with exchange rates rising steadily both yesterday and today (Friday). Pound/Euro is back at 1.16 and Pound/Dollar has recovered comfortably above the $1.50 mark. 

In my post today I will explain the reasons why the Pound has gone up against the Euro, and also have a look at next week’s data, as there are some important things happening that will affect exchange rates in the coming days and weeks. 

In today’s report: 

• Mervyn King talks up the Pound 
• Qatar may invest £10bn in the UK 
• Budget to be delivered on 20th March Risks remain to UK economy 
• Next week’s events that may affect exchange rates 

Mervyn King talks up the Pound 

The main reason for the rise in exchange rates is positive comments from the Bank of England governor Mervyn King. Yes you read that right – he actually made positive comments about Sterling! In some of his most upbeat comments since the financial crisis, he said that “there is momentum behind the recovery that’s coming” and that “good progress” has been made towards a new, sustainable economy in the last few years. 

He also retreated from his earlier attempt to talk down the pound, which he has done several times this year already. Having said recently that the 8pc appreciation in sterling “was not a welcome development”; he cheered its recent decline to a two-and-a-half year low and suggested the pound had fallen far enough. “We’re certainly not looking to push sterling down,” he said. “We are moving to a properly valued exchange rate. I think we’re probably there.” 

These comments caused the Pound to rally, pushing back up against most other currencies, which will be a welcome relief for anyone looking to buy currency with the Pound any time soon. The Governor also revealed that he has held discussions with the Chancellor and the Prime Minister about their economic strategy Last week, the Prime Minister hinted that the Bank would get new tools to boost growth in the Budget, saying he backed “monetary activism” and that “the Bank must support the recovery”. 

Sir Mervyn’s comments came despite his recently voting to increase quantitative easing by £25bn to £400bn, and amid weak economic data for the last two months that have rekindled fears of a triple dip recession. 

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So that’s that then, the Pound is now on the way up? 

The currency markets are notoriously volatile, and we often see wild swings in both directions. Putting Mervyn King’s comments to one side for a moment, let’s look at the actual state of the economy in the UK. 

The National Institute of Economic and Social Research (NIESR) said British economic output had contracted between December and February; indicating the economy would struggle to avoid recession. 

Strategists also said minutes from the central bank's Monetary Policy Committee on the likelihood of further quantitative easing (QE), the UK budget on March 20 and data releases were likely to see sterling suffer further losses. 

Markets will remain wary of sterling ahead of the UK budget next week, and of course the latest BoE minutes, both of which we will see on Wednesday. Despite the positive comments, unless Mervyn has some king of crystal ball, I can’t see that much has changed to be honest. Growth is still slow, we may still head back in to recession, and most still thing further QE may happen in the next few months. This then may be a temporary upwards spike, however I expect markets will now await next week’s releases before the GBP/EUR cross makes significant changes in either direction. 

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Qatari investment rumours also spur the Pound on 

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Qatar has begun talks with the UK government to invest up to 10 billion pounds into key infrastructure projects in Britain, the Financial Times reported earlier this week, citing people involved in the negotiations. They reported that officials and ministers from both countries held talks over what schemes the Qataris could invest in and whether a specific fund could be set up for the same. 

This would be a welcome development for the struggling UK economy, and so went some way to helping bolster risk appetite for Sterling. 

Data Next Week that I think could affect exchange rates 

On Tuesday we will see UK inflation data and Retail Sales, which are a good barometer of overall economic activity, and so will be closely watched. 

Wednesday is probably the most important day for Sterling in my opinion. We have the minutes to the recent BoE decision not to pursue any more Quantitative Easing. If this shows 3 or 4 members voted for it, then we may see the Pound weaken as it will increase the chance of QE in April or May. 

Also on Wednesday The Chancellor George Osborne will deliver his 2013 Budget. Speculation is mounting that Chancellor George Osborne may announce a review of the Bank of England's remit and give it more leeway on inflation targeting, so this will be watched closely. I’ll do a full report on 

Thursday regards what effect Wednesday’s data has on exchange rates Thursday will see some EU inflation data, but to be honest I expect markets will still be reacting to Wednesdays BoE minutes and budget. 

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Will the Bank of England weaken the Pound?

Tuesday 5th March 2013 
Good afternoon. After the volatility seen in exchange rates in recent weeks, this week so far has been relatively calm. The Pound/Euro rate has hovered around the 1.16 mark, with Pound/Dollar rates rising from 1.50 to 1.5120. In this afternoons post I will take a look at what data releases we have had so far this week, and also explain some key information that will come from the Bank of England that could cause exchange rate volatility to continue. 

Pound gains a little on UK Retail Sales data 

This morning figures were released that showed that UK retail sales grew at fastest rate for years in February. UK retail sales grew at their fastest rate in more than three years in February, as the drier weather coaxed shoppers back out onto the High Street. The news gave the Pound a little boost, however the gains were limited given the markets are awaiting some key releases from the Bank of England, which I will expand on a little later in today’s post. 

However the BRC figures contrasted with a recent CBI survey which reported that food stores suffered their worst performance for five years in February, which is why any gains for the Pound were fairly muted. 

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Construction falls in February 

Output in the UK construction sector fell again in February, a survey indicates, as the sector suffered its worst month since October 2009. The Markit/CIPS construction purchasing managers' index fell to 46.8, compared with 48.7 in the previous two months. 

A score under 50 indicates contraction. The last time the index was in positive territory was in October last year. CIPS chief executive David Noble said there was "barely a crumb of comfort" in the figures. The figures re-enforce the fact that the UK economy is struggling at the moment, and this is also reflected in the value of the Pound. 

Key Bank of England releases this week could affect the Pound. 

In recent months, much of Sterling’s weakness can be attributed to the Bank of England. As I’ve already covered on my blog in recent weeks, the BoE have taken every opportunity to weaken the Pound in press conference and comments to the media. They have themselves stated that they wish Sterling to depreciate further. 

Tomorrow morning (Wednesday) at 09:45am we have the BoE governor Mervyn King giving a speech. In the press conference he will give his views as to how the BoE observes the current UK economy and the value of the GBP. His comments may determine a short-term positive or negative trend. I think it’s very likely he will again use this opportunity to warn of downside risks to the UK economy, and so it would be no surprise to see Sterling weaken on his comments. 

Following his speech, at 12:00pm on Thursday the BoE’s rate setting Monetary Policy Committee (MPC) will announce its latest decision on interest rates and Quantitative Easing. While I expect rates to be left on hold, there is a real chance they could extend the QE programme. In the last meeting, 3 of the 9 members including the governor Mervyn King voted to increase the programme. So on Thursday it will only take 2 more members for a majority. 

If further QE is announced, then expect the Pound to fall further. QE effectively floods the market with Sterling effectively devaluing the currency. The last time QE was announced Sterling fell significantly within a few minutes. 

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What does this mean if you need to buy or sell currency? 

The currency markets have been incredibly volatile recently, and it wouldn’t take much for the exchange rate to change dramatically and without warning. If you are buying Euros, then there is much happening that suggests the Pound could weaken further. You could consider fixing the rate now with a Forward contract to protect against this. One article in the Sunday Times recently suggested rates could fall as low as parity, where you would only receive €1.00 for £1.00. 

For those selling foreign currency back to Sterling, the current weakness in the Pound is good news. While rates may fall further, risking all the gains you have already made for slightly more could cost you dearly. There is still much happening in Europe that could weaken the Euro again, such as GDP figures released for the whole EU area tomorrow. To protect against adverse movements, you can place a Stop Loss order which means if the market moves against you, your currency is converted at a pre-agreed level. In this way you can still take advantage of any gains without risking losing all the movements in your favour over the last 8 weeks. 

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Pound/Euro forecast; rates could drop further

Monday 26th November 2012

Good morning. The Pound/Euro exchange rate fell quite a bit last week, and the forecast is for this to continue. This is partly due to events in Europe, but also due to the fact the Bank of England governor is speaking again this week, and could well talk the Pound down further. So what have I got for you in today's post?

 

In this week’s Report: 

• Pound/Euro rates in decline last week
• Bank of England speech this week could weaken Pound further 
• EU fails to resolve Greek/EU debt issues 
• Round up of the week’s other data that may affect rates

Sterling vs. Euro; 

Pound/Euro rates last week were largely dominated by discussions between the IMF and EU Finance Ministers, over a €44 billion Greek bailout. The single currency strengthened considerably, due to the optimism of the aforementioned plan, but was clouded mid-week by continued disagreements between the two deciding factions. As you can see by the chart below, rates have been in decline now for a few weeks. 

Reports on Monday last week outlined that an agreement was expected the following day that would allow Greece to access the bailout monies allocated from December 5th. However, following a twelve hour meeting no solution to Greece’s debt problems could be met, prompting Christine Lagarde to say that the meeting had yielded progress but the technical details could not be ironed out. 

The euro, which had been steadily strengthening due to the meeting’s publicity, retraced part of its gains as speculators were reminded that solving the region’s debt-crisis cannot be done by simply releasing bailout funds. 

What caused the Greek debt crisis?

 

The Greek crisis emanated from enormous borrowing which grew exponentially since joining the euro. Public spending soared after adopting the single currency; costs which were not offset through taxation, largely due to widespread tax evasion, making it impossible to balance the books. When the Global Financial Crisis occurred it wiped the foundations from Greece’s house of cards, and essentially made it impossible to repay their lenders due to the staggering debt-levels they had accumulated. 

The high emphasis on a Greek rescue stems from a fear of contagion. Contagion is the notion that if Greece were to default on their debts, a similar cycle of events could affect countries like Spain, Italy and Portugal. The cause is a result of the fear that these countries could follow Greece’s example and default on their obligations. 

Not only this, but the losses associated with a Greek default would significantly dampen Global liquidity; in a nutshell, when people are fearful and refuse to spend, economies become stagnant. Talks are on-going which for the GBP/EUR rate means that an agreement could see the rate drop further as the euro strengthens. However if there are more delays or compromise can be met, this could see the rate bounce back as the single currency will weaken. So things really could go both ways in the coming weeks. 

Mervyn King could talk the Pound even lower

One argument for rates dropping further, is a continuing weakness in Sterling. The Governor of the Bank of England is speaking on Thursday and is largely expected to pour cold water on Britain’s economic progress, as he did a few weeks ago. Many believe that this is an attempt to weaken the pound as a ploy to increase our competitiveness in the export market; as the EU is major trade partner. This comes despite some positive data from the UK which saw momentary retracements on the euro’s strength last week. 

How to protect against the rate dropping

If the euro is your currency of interest, send me a free enquiry and I can get in touch to discuss your options. If the Market appears to be moving against you, Forward Contracts and Stop Orders are great ways of protecting yourself from adverse Market movements. If the rates are going in your favour, Limit Orders allow you to set an optimistic level in the Market which can be automatically purchased, 24 hours a day, seven days a week. 

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Weekly Economic Data that may affect exchange rates 

Monday – The main data that could affect GBP/EUR rates today is from Germany. We have a host of data from Europe’s largest economy, including Retail Sales, Import Prices and a Consumer Confidence Survey. Staying in Europe, we also have the EcoFin meeting, which covers areas such as coordinated economic measures, budgetary policies, public finances, capital movements and financial markets. Elsewhere we have Trade Balance figures from New Zealand, and manufacturing data from the USA. 

Tuesday – An important day for the Pound, as we will have GDP figures, House Prices and Business Investment measures. There is nothing major from Europe, but across the pond we’ll see US House Prices, Consumer Confidence, and Speeches by various members of the Federal Reserve. 

Wednesday – Nothing from the UK today. We do have some German inflation figures along with Spanish Retail Sales. IN the USA we will see some further Home Sales data, which is a good barometer of overall economic health. 

Thursday – A fairly busy day today. Starting in the UK we have Consumer Credit, Mortgage Approvals, and a Speech by the Bank of England governor Mervyn King. Be very mindful of this, as last time he spoke he talked the Pound down by a significant amount. It’s followed by a UK Financial Stability report. In Europe we will see Consumer Confidence, Economic Confidence, Industrial confidence along with German unemployment numbers. In the states we have Jobless Claims, Homes Sales and manufacturing numbers. 

Friday – The only UK data of note is consumer confidence and an inflation report. In the Eurozone we have Inflation numbers, unemployment numbers and Retail Sales. We end the week in the Americas with inflation numbers from the USA and GDP figures from Canada.  

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