Friday, 21 October 2016

Contrasting UK and EU economies

Super Mario causes brief dip in GBP/EUR rates 

Yesterday the European Central Bank (ECB) kept their interest rates on hold and their stimulus programme unchanged, but comments in the press conference afterwards caused a brief strengthening of the single currency. There had been rumours that the ECB would start to taper their Quantitative Easing (QE) programme from March, however ECB President Mario Draghi said policymakers had neither discussed extending the ECB's extensive bond-buying programme, nor ending it.

This sent the Euro higher, and briefly caused GBP/EUR to dip by 1%. He then added however that there would not be an abrupt end to the stimulus, hinting that they could extend the programme beyond the March 2017 deadline. This weakened the Euro again putting the GBP/EUR pair back to where it started, just above €1.12 level. In December, the ECB will discuss when and how to end the stimulus programme, so watch this space.

Contrasting economies 

There’s a good chance they will extend the programme further, given the state of the EU economy. France and Italy showed no growth at all in the last quarter. Spanish, Italian and Greek youth unemployment is around 50% (!) and Germany is starting to slow. In terms of stimulus it’s hard to know how much more of a following wind the EU could have; austerity has almost ended, interest rates slashed, a flood of printed cash from Mario, and yet the economy fails to recover. The ECB’s first chief economist and architect of the Euro said this week that it is a house of cards that will inevitably collapse, due to the system being compromised by bailing out bankrupt states in violation of the treaties. 18 years ago, 61% of our trade was with the EU. Today this is 43% and falling. Non EU trade makes up the majority of our overseas trade, is rising and is in surplus.

In stark contrast the UK economy is looking relatively vibrant. Figures yesterday revealed that UK Retail Sales grew at their strongest level in 2 years in the last quarter, and consumer sentiment remains firm. Yesterday Employment figures showed that the UK has full employment, with less than 5% unemployed. Manufacturing, Services and Industrial production are all performing well.

What does this mean for GBP/EUR exchange rates? 

The above should mean a strong Pound and a weak Euro, however as you’ve probably noticed, the opposite is true. Good for exports perhaps, not good when it’s causing inflation to rise too fast. If it rises above wage growth then real incomes will start to be affected. What this shows is that it is politics rather than fundamental data that is driving the value of the Pound at the moment, and due to this Sterling remains subdued due to uncertainty over what trade agreements the UK will be able to make with the EU, and the rest of the world, next year. Once there is a clearer picture of what the UK economy will look like, there is every chance that the Pound will rise and exchange rates recover. However the road is a long one, and while uncertainty remains, its likely Sterling will remain low against other currencies. If focus starts to shift to the fundamentals however, we could see rates recover.

We’ll end today’s report on a positive note with some light economic history. The immediate reaction to the UK leaving the Gold Standard in 1931, and again to sterling’s exit from the ERM in 1992, was similarly adverse, and even alarmist. Yet on both occasions the lower exchange rate helped to secure a following period of robust economic growth. Let’s hope history repeats itself.

For the sake of both the UK and EU economies, let’s hope that when Article 50 is triggered, the 27 member states are familiar with Article 8.

Tuesday, 18 October 2016

Pound rises to €1.12 vs Euro

The Pound has risen today. This is not a mis-print. Sterling has actually managed to make some gains against other currencies. GBP/EUR has risen by a cent to around €1.12, the highest it's been since the flash crash.

Why has the Pound gone up against the Euro?

There are 2 reasons that Sterling has risen today. Firstly, it seems that the high court challenge regarding invoking article 50 was, as I expected, a waste of time. The Lawyer for the government said today that it's highly likely parliament would have to ratify any Brexit deal with the UK. If the challenge had been successful it could have created even more uncertainty surrounding Brexit, so it has brought some clarification to the process, and given the Pound some support.

The second reason for the rise is the fact figures today have shown that inflation is up to 1%, the highest it's been in 2 years. This is a result of the weak pound pushing up import prices, that are now starting to feed through to goods. The reason the Pound has risen is because higher inflation usually leads to higher interest rates. While I don't think the Bank of England are likely to raise rates any time soon, it does mean that it's unlikely a further cut is on the cards. It also makes the BoE look like they acted a little prematurely in cutting rates earlier this year, as economic figures from the UK actually show an economy proving to be resilient to the effects of the referendum result. Less chance of a further cut in interest rates mean a stronger currency, hence the gains for Sterling today.

Will Pound keep rising?

We'll get further economic figures from the UK tomorrow in the form of the latest unemployment and jobs figures. However even if data continues to impress, I don't think this is the start of a rally for the Pound. The UK current account deficit is at record highs and this is likely to keep the Pound low. And of course the uncertainty caused by Brexit hasn't gone anywhere, and is unlikely to do so in the short to medium term.

Any clients hoping for GBP/EUR rates to rise should look to problems in the EU. There is interest rate and stimulus decision on Thursday from the European Central Bank, and if they hint at further measures being necessary to stimulate the economy then the Euro might weaken, pushing GBP/EUR higher. Even if the Euro weakens further however, it's likely any gains for GBP/EUR will be limited as Brexit pins Sterling firmly to the ground.

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Monday, 17 October 2016

When will the Pound go back up against the Euro?

Pound/Euro rates have stabilised a little, after a dire start to October. At the time of writing GBP/EUR is just below €1.11. The Pound has been falling due to concerns about the UK giving up access to the single market, despite the fact the economic figures show that the UK economy remains resilient.

In the mainstream media, the falling Pound and a potential 'Hard Brexit' that would mean giving up free access to the single market have been dominating the headlines. But if you look past the negative reporting in the mainly left wing outlets such as the BBC, Guardian et al, maybe it won't be the Armageddon that's being predicted. The US, China Japan and Australia all have access to the single market without being in it. All they need to do is meet the EU's regulatory standards. There is no reason the UK cannot do the same. Then, when you look at how much of our trade is within the EU, you start to realise there is a world outside of the EU's borders.

For example, there were some interesting figures in an article I read this morning that show that 18 years ago, 61% of our trade was with the EU. Today, it's 43% and falling. Non-EU trade is rising, is in surplus, and makes up the majority of our overseas trade. A point to remember is that EU trade is falling and in deficit. The single market perhaps then should not be the only focus of how the UK will trade globally in the future. One of the founding architects of the EU monetary union himself has also warned that the EU is a house of cards that is doomed to collapse.  The EU has huge levels of unemployment, and seems to me to be an unsustainable ponzi scheme rife with protectionism that is doomed to fail sooner or later.

When you take a balanced look at the situation therefore, there is every reason to believe that in the long term the UK economy will prove resilient and remain one of the largest and strongest economies in the world. This should in time help the Pound recover. In the here and now though, the uncertainty that is currently dominating the currency markets is keeping downward pressure on the Pound, and I see no reason for that the change in the short to medium term. In time when it becomes clearer what our relationship with the EU and the rest of the world will look like, I think Sterling will bounce back to recover the losses we have seen over the last 6 months. So in summary, I think that yes the Pound will recover against the Euro, however this will take some time, and it's likely to be well in to 2017 before any recovery starts to materialise. The doom mongering and negative reporting in the press isn't helping either, and nor is the political bickering between Labour, The Conservatives and the SNP.  Things could well get worse before they get better.

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Thursday, 13 October 2016

Brexit uncertainty keep Pound at record lows

Earlier this week we saw the Pound fall to record low levels against the Euro and the US Dollar, however yesterday saw some respite for Sterling. Theresa May had said that the government would allow closer scrutiny of their negotiation plans, which gave Sterling a little lift. The rally didn't last long however, and the Pound is on the back foot again, after a change of tone and insistence that parliament would not be given a vote, and that the government alone would invoke article 50.

It's starting to get a little messy, with a legal challenge in the high court on Monday, raised by pro-Remain campaigners, aiming to give parliament a vote on whether to invoke Article 50. This in my view is a complete waste of time as the referendum was ratified by parliament and all this is going to do, whether successful or not, is increase the uncertainty that is putting pressure on the Pound. Nicola Sturgeon has also started making noises about another independence referendum.

This is all starting to get very political, and it's not going to help the Pound at all. I think if this bickering continues then all it will do is push the Pound lower and lower, pulling exchange rates down even further from where they are now.

Brexit; love it or hate it?

And as I'm sure readers will know, there is also a row between Unilever and Tesco due to the former wanting to raise prices of things like Marmite and Pot Noodles by 10% due to the fall in the value of the Pound, and Tesco digging their heals in "to protect consumers". Hmm. I don't remember my martime being much cheaper when GBP/EUR was at €1.44 last year.

I'm partial to some marmite from time to time and personally not that bothered about paying 25p more for a jar, but what this does demonstrate is that the weak Pound will start to filter through to consumers. I think that it's high time Labour, the SNP and the Conservatives stop their political bickering and points scoring, and start to work together in the best interests of the British people.  Personally I think it's time to look to the future, and work together to ensure that Britain can remain prosperous as an independent sovereign nation, however the current political in-fighting will not help in this regard one bit. What's needed now is some stability and certainty over what is happening. Until we have that, expect the Pound to fall further against other currencies.

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Tuesday, 11 October 2016

Sterling falls into the €1.09's against the Euro.

The Pound seems to be in free fall at the moment. Today has been another terrible one for Sterling. At the time of writing GBP/EUR is now down to €1.0970 and GBP/USD is down to $1.2137.  The fall could be due to rumours a major Russian bank are going to remove their European Hub from London, raising concerns over the future of the UK financial centres in London.

I'll post a more detailed update tomorrow morning, and in the meantime you can follow live graphs that run 24/7 here.

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