Pound vs Euro Forecast June 2010

Good Morning. After the bank holiday break, the markets return to normal this morning. Sterling to Euro rates are still holding near 11 month highs due to Euro weakness. We'll have a detailed look at what's happening in the Eurozone today. First, at 08:30am this morning rates are as follows:

Pound vs Euro Analysis

Last week was one of relative strength for Sterling as it rallied against the Euro from levels of 1.15 on Monday the 24th of May up to highs of 1.1872, last seen in June 2009 on Thursday afternoon.

Sterling’s strength did not come from its own strong economic fundamentals however, but more the dire straits that the euro zone finds itself in and a report from The Organization for Economic Co-operation and Development (OECD) which said that “due to the continuance of higher inflationary pressures within the UK the raising of Interest rates by the MPC towards the end of the year were inevitable.” These two factors combined sent investors flooding back to the pound and soaring against its beleaguered neighbour.

Sterling's Climb was however halted abruptly on Thursday, after news that UK consumer confidence fell for the third consecutive month in May, reflecting uncertainty ahead of the election result and the prospect of fiscal tightening once a new government was in power. This bad news was also coupled with a release from The State Administration for Foreign Exchange (SAFE) China's foreign exchange regulator who deploys the nation's excess reserves.

It denied through its website that it was reviewing its euro-area holdings saying, "Europe has been, and will be, one of the major markets for investing China's exchange reserves” This single statement and positive tone helped the euro to gain ground leaving behind its lows of earlier in the week.

With euro zone government debt worries outweighing concerns about the UK, one could expect to see further downside for the euro, at least in the near term.

On Monday panic hit the currency markets and the Euro started to flounder as it came under renewed pressure. This time instead of the pressure coming from the euro zones lead economy Germany, who the week before had undermined the Euro with its ban on short selling, This time renewed concerns about EU debt crisis continued to surface following comments on Monday from the IMF that the Spanish economy needs reform.

This comment came just as the rescue of Spanish bank Cajasur by the Bank of Spain sparked fears about the stability of Spanish Banks.

Subsequently four Spanish banks have since announced plans to merge. These concerns have hampered the Euro and lead investors to seek "safe havens" for their money with the US Dollar being the big winner and the home of the majority of FX reserves worldwide.

To help combat the negativity surrounding the euro zone and its flagging currency Spain, Portugal and Italy as well as Greece have all released austerity measures to try and ebb the flow of Euro zone decay.

The continued weakness of the euro is a concern, with investors dumping the currency amid fears that debts will cause defaults by weaker countries in the European Union. The single currency has fallen in value by almost a fifth against the dollar in the last six months.

It is worth noting that Sterling is closely aligned with that of the single currency. Debt worries continue both in the UK and Europe, Austerity measures have been announced by both and with 54% of UK exports heading to Europe it is no wonder that the pound finds itself struggling against the Dollar whilst frequently undergoing abrupt shifts and reversals against the Euro.
When reviewing the weeks data and fundamentals as mentioned, it continues to show the fragile state of Sterling and the UK Economy.

Time will only tell but the continued economic weakness in both economies will halt the dramatic gains that many had hoped for during the summer months and instead will be replaced by a volatile and uncertain market.

It's likely that economic data this weak will play second fiddle to ongoing developments in the Eurozone. Once things settle down in the EU, it's likely that the currency will regain strength and rates will fall. When that will happen, is the key question that nobody can answer.

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