Pound falls sharply on news of more BoE Stimulus

Friday 15th June 2012
Good morning everybody. Why has the Pound fallen against the Euro this morning? Things can change very quickly in the currency markets, and in my last post GBP/EUR rates were getting close to €1.25. The facts have now changed, and so has the exchange rate; the Pound has fallen sharply this morning, after The Bank of England announced yesterday evening that it will launch two new stimulus packages in response to the worsening economic outlook:


Sterling falls sharply on news BoE to pursue more stimulus

When the markets opened at 8am this morning the reaction was severe, and Sterling has dropped sharply across the board, as the chart above shows.

In the new developments, it was announced that together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies. Banks will also have access to short-term money to deal with "exceptional market stresses". The chancellor said the measures would "inject confidence".

In the announcement, the governor Mervyn King said that "We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep,"

Indeed on this blog I have been warning for some time that the EU debt crisis could well start to affect the UK, and this is what we are now seeing.

The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, hoping that the institutions that sell bonds to the Bank then use the money to buy up other assets, but that hasn’t always been the case. Some have said that they have held on to the money undermining the effectiveness of QE. Regardless the additional currency in the system has weakened the Pound in recent months.

You can read more about the £140bn scheme to kick-start stagnant economy here on the telegraph website.

Euro crisis deepens and affects Spain

As expected, Spain is the latest country to be dragged into the debt crisis, having earlier in the week taking a €100 billion bailout of its banks. Yesterday it was seen that Spain's borrowing costs hit 7% which is a level widely seen as unsustainable. Italy's borrowing costs also rose sharply meaning we could now see bailouts for these two countries.

Greek elections this weekend

With Greek elections taking place this weekend in what is being seen as a referendum on the euro, analysts have warned of potential further shocks to the financial sector. If the anti austerity Syriza party succed, then they may well effectively be voting themselves out of the single currency.

What is certain is that whatever happens this weekend, the market reaction on Monday morning is likely to be quite severe, as for many weeks investors have been waiting for this event before deciding what to do with their currency.

On Monday I will post a full analysis of the results, and what the Greek elections could mean for the Pound/Euro exchange rate forecast.

Pound/Euro exchange rate forecast

Many clients have been convinced that the Euro debt crisis would continue to weaken the Euro making the GBP/EUR exchange rate higher. Indeed on this very blog I have been warning for some time that this may not be the case, and in fact the UK is not immune to the EU’s problems. Sterling is at risk of falling if more stimulus is needed. This is now what has happened, and the 3.5 year highs seen recently now seem a distant memory.

Where rates will go moving forwards is impossible to predict, but with so much uncertainty surrounding the UK and EU economies, rates could go either way. Currently there is not much support for Sterling in the wake of yesterdays announcements, and so in the short term I don’t expect rates to rise back to €1.25 any time soon. I would expect rates to stay in the €1.22 to €1.2350 range for the moment, but on Sunday when the election results are seen, I'm sure the market will correct accordingly. Of course I will post a full analysis of what the election results mean on Monday morning.

What to do if you need the best exchange rates

With much volatility and conflicting opinions on where markets are headed, it’s more important than ever to know your options, and take advantage of the expert knowledge I can offer you for no cost. I have worked in the FX markets for nearly 10 years and so have a very good knowledge of not only what moves exchange rates, but strategies and tools you can use to help you achieve the best possible exchange rate.

If you need to buy or sell any international currency, send me a free enquiry now to find out what your options are. Everybody’s requirement & attitude to risk is different, but in having a free consultation and gaining full knowledge of all the options available to you, you can make an informed choice on what is best for you.

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EU Debt crisis & Pound/Euro forecast

Wednesday 13th June 2012
Good morning everybody. We started the week down in the €1.22’s against the Euro, which was supported by news of Spain’s Bank bailout over the weekend. It was hailed as great news for the Euro, and initially the single currency seemed supported. The spin did not last long however, and soon after markets opened the Euro started to weaken again. By yesterday fears that the crisis that has spread from Greece to Spain is now on the way to Italy and Ireland – this caused the Euro to weaken yet again, pushing rates higher.

In today’s post I’ll have a detailed look at the EU problems, the UK’s exposure to them, and what it all means for the Pound/Euro exchange rate forecast.

EU worries push Pound/Euro close to €1.25

Over the weekend it was announced that Spain became the fourth country in the crisis-torn Eurozone to ask for international aid when it was forced to ask for a bailout to prop up a banking system saddled with £150billion of toxic property loans.

The financial markets initially welcomed the deal but investors soon sounded the alarm over the impact the bailout will have on the country’s mountainous debts. On Monday morning everyone was hailing it as great news for the Euro. Hmmmm.

The initial optimism proved short-lived when the markets started trading in earnest on Monday and Tuesday. The Euro suffered considerably as fears over how the money would be funneled to banks hit sentiment, as questions surrounded the terms of the deal, which will add to Spain’s debt burden.

Indeed Spain's borrowing costs have risen to the highest rate since the launch of the euro in 1999, and also Italy's 10-year bond yield rose to 6.28%, a rate not seen since January, as concerns about its finances rose. The interest rates are seen as unsustainable in the long run for two countries weighed down by huge debts. So there could be more bailouts for other countries.

Crisis Spreading to other countries?

While the Eurozone debt crisis has been a cause of concern for some time, it has so far affected relatively smaller economies such as Greece and Portugal. However, as the crisis spreads to bigger nations such as Spain and Italy, there are fears that growth in the region may slow even further.

Cyprus, which is heavily exposed to Greece, hinted it may become the fifth country in the single currency to need a bailout following the rescues of Greece, Ireland, Portugal and now Spain.

It is this spread that has spooked the markets and caused the Euro to fall in value yesterday, getting close to €1.25. So maybe the bailout wasn’t the ‘great news for the Euro’ that the spin doctors had hoped for on Monday morning. Indeed they are, in my opinion, still simply 'kicking the can down the road' and hoping the problem will go away.

Pound remains vulnerable

Following a string of recent weak UK data, a growing number of analysts think the BoE could opt for another bout of asset purchases under its quantitative easing programme, possibly as early as next month. It remains uncertain whether or not the BoE will opt for further QE.

Although the economy is weak, some policymakers have expressed concern that inflation remains too high. But BoE policymaker Adam Posen struck a dovish tone on Monday, saying the central bank should buy assets other than government bonds in order to boost the UK's ailing economy. I for one think we will see further QE, and in fact the IMF and BoE have hinted as much in recent weeks. More QE would weaken the Pound, and of course if the EU debt crisis continues to spread then it will also affect the Pound due to our exports.

What does all this mean for exchange rates?

They key question everyone wants to know is will the GBP/EUR rate keep going up past €1.25 testing new highs, or will it drop back away again as it has now done several times since hitting the 3.5 year high several weeks ago.

One thing I am certain of is that the Euro will continue to lose value. What is impossible to quantify is how the Pound will fare in the shadow of the EU problems. 50% of our exports go to Europe, and of course our banking industry is heavily tied to the EU, so a further escalation of the crisis could start to affect the Pound.

Couple this unknown quantity with the threat of further QE and there is a strong case to be made for the Pound/Euro rate to struggle to make further gains and indeed drop back away.

Don’t just hope for the best rates; make it happen

With much volatility and conflicting opinions on where markets are headed, it’s more important than ever to know your options, and take advantage of the expert knowledge I can offer you for no cost. I have worked in the FX markets for nearly 10 years and so have a very good knowledge of not only what moves exchange rates, but strategies and tools you can use to help you achieve the best possible exchange rate.

If you need to buy or sell any international currency, send me a free enquiry now to find out what your options are. Everybody’s requirement & attitude to risk is different, but in having a free consultation and gaining full knowledge of all the options available to you, you can make an informed choice on what is best for you.

Click here to send me a free enquiry