Good morning. It's Halloween, and it will be interesting to see if the markets are still 'spooked' over the debt crisis, or if last weeks late night agreement will help stabilise the Euro and 'raise Greece from the dead'. Today we will have a detailed look at the movements in Sterling/Euro and Sterling/US Dollar over the last week, and the forecast and predictions for where rates may be headed.
In this week’s Report:
• EU summit agreement strengthens Euro, pushing GBP/EUR lower
• GBP/USD hits 7 week high on dollar weakness
• Uncertainty over further QE keeps Sterling at risk
• Round up of the week’s data that may affect rates
(For currencies other then GBP, EUR and USD, contact us for a consultation)
Sterling vs. Euro;
All eyes were focused on the outcome of the EU Summit meeting last week. GBP/EUR started the week around the €1.15 level, and stayed relatively steady until Wednesday’s EU leaders meeting in Brussels; they agreed to expand the Euro zone’s main bailout fund to 1 Trillion Euros. Banks also accepted a 50% ‘hair cut’ of Greece’s debt. Following the announcement we saw a drop of nearly 1.5% with a low of the day being €1.1326 as the Euro gathered strength and became more expensive to purchase.
Earlier in the week, Sterling didn't react very much on Tuesday after comments from the Bank of England Governor Mervyn King; King said they had come very close to restarting QE in September but held off to see if volatility would subside, before taking the decision to resume in October. Recent economic data has shown a darkening outlook forcing people to cut back on spending.
The real volatility started mid week, with EU Leaders agreeing to expand the single currency's bailout fund to 1tn euros and to take measures to recapitalise banks. Under the terms of the Brussels deal, banks must raise more capital to protect themselves against losses resulting from any future defaults. Markets seemed to react positively to the news, with the Euro gaining strength and exchange rates reached the low 1.13’s as a result.
In addition to the Euro and riskier currencies rising, Banks also performed well, underlying the fact that global investors think the deal will finally help to end speculation on what will happen over Greek debt.
A Co-ordinated approach is going to be needed for all involved within the Eurozone. The debt crisis is a double-edged sword for sterling/euro rates – as a risky currency closely tied to the Eurozone, the Pound has gained a little strength on the news. However, the Euro has also gained and the net result is lower exchange rates.
As the Euro has fallen and there are further concerns over how this latest round of QE will affect the cross, it will be interesting to see how the GBP/EUR will react and which currency will be shown to be the strongest or even the most resilient to slow economic growth.
With uncertainty remaining over the direction of Sterling/Euro, if you need to buy or sell Euros, send us an enquiry now by clicking here, and find out how to get the best exchange rates.
Sterling vs. US Dollar;
Sterling steadied against the Dollar on Friday, staying just shy of a seven-week high, with markets taking a breather following a huge rally in riskier assets the previous day after a deal was struck on Europe's debt crisis. Sterling entered Friday steady at $1.61 versus the Dollar, not far from a peak of $1.6140 hit on Thursday when equities and riskier currencies rallied after the Eurozone deal and as solid U.S. growth data eased concerns about the global economy. Analysts have said that a weekly close around $1.6140 may signal the potential for further gains towards $1.63.
A survey by GfK NOP (National Opinion Polls) on Friday showed British consumer confidence fell to its lowest level since February 2009, adding to evidence that the economy risks returning to recession. Bank of England policymaker Paul Fisher said on Thursday there was a significant chance the UK could suffer another recession and more asset purchases could be necessary after the current round is completed.
"Dovish comments from BoE's Fisher yesterday morning held back Sterling’s gains versus the Dollar, and Sterling underperformed during the recovery in risk sentiment," commented analysts at Lloyds.
Earlier this month the BoE embarked on a second round of Quantitative Easing aimed at stimulating lacklustre economic growth. QE involves flooding the market with pounds which is seen as a negative for the currency as it dampens demand. This may be the case, however some analysts stated that despite a weak UK economic outlook, Sterling would remain supported against the Dollar due to the fact that further QE in the UK has already been announced, while speculation over more monetary easing from the U.S. Federal Reserve has picked up in recent weeks.
If anyone is left scratching their head as to why the Greenback has toppled, they should ask themselves one question: why would I buy the US currency? If we look for the basic appeal of the unit, we lack yield (the Fed base rate is on hold until mid-2013), growth is on par with the lacklustre global pace, the money supply has been flooded and the world’s largest economy is considered the lender of last resort for the rest of the world.
Do you need to buy or sell US Dollars? Send us a free enquiry now.
Weekly Economic Data that may affect exchange rates
Monday – A new week. UK data starts with Consumer Credit, Money Supply and Mortgage Approvals. In the EU we have Unemployment data and Inflation numbers. Australia has some Private Sector credit data. In Canada we will see Gross Domestic Product figures.
Tuesday – Australia releases House Price data and there is also an interest rate decision. In the UK we will see Gross Domestic Product figures – these are important as it shows at what rate if any the economy is growing. There is some minor construction data from the USA.
Wednesday – Today we see the minutes from the US decision to hold interest rates. Staying in the states we also see mortgage applications, employment data, and at 16:30 there is an interest rate decision. There is little UK data today other than PMI construction. There is a lot to watch out for from the Eurozone: German unemployment in addition to German and EU inflation data.
Thursday – Australian retail sales are released today. There is the G20 meeting also that may throw up a few surprises. In the USA there are jobless numbers. In the EU we have an interest rate decision followed by a press conference – this often causes swings in GBP/EUR rates.
Friday – The G20 meeting continues today. From the Eurozone we have further inflation numbers, this time the Producer Price Index. In Canada there are Unemployment and Building permit figures. In the USA we will see Non-farm payroll & unemployment data.
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