Why has the pound fallen against the Euro Wed 30th June? Sterling fell in a big way against most major currencies on Wednesday. We've been saying for some time that the surge would not last forever, and the dramatic fall illustrated this. The drop is due to a combination of Euro strength and Sterling weakness, in a polar opposite of recent trends. We'll now look at the reasons in detail:
Euro gains strength
The single currency was boosted by increased demand at the half year end, and also a lower than expected take up of 3 month loans by the ECB. Concerns about the health of some EU banks meant that there was market expectation of a borrowing spree from the European central bank. When the tender happened Wednesday, there was much less take up than expected. This meant concerns over the finance of EU banks was eased. This increased confidence, and the Euro gained as a result.
Also on Wednesday, there was sovereign demand for Euros due to month end and half yearly flows. The two combined meant there was demand for Euros. This strengthened the single currency and helped push it higher after falling to it's weakest in 18 months earlier this week.
UK to fall back into recession?
Another reason rates have fallen Wednesday is due to Sterling weakness. Bank of England policy maker Adam Posen said that the UK could fall back into recession.
In a speech he said the economy was trapped between 2 outcomes. The first one dominated by budget austerity in the EU which will hurt growth, and one by recovery in the rest of world.
He said he wasn't confident of a full economic recovery, fearing the economy could head back into recession. The comments pushed the pound slightly lower, compounding the Euros gains meaning we fell from €1.2360 down to the mid €1.21's in the afternoon.
So what will happen next with exchange rates?Some analysts said the Euro's broad gains versus sterling on Wednesday were simply a pause in the single currency's latest sell-off, as investors remain concerned that the ECB may be winding down monetary stimulus too quickly. This view would mean that the exchange rate could recover back in the coming weeks.
Other analysts however say that this could be the start of a Euro recovery, and coupled with uncertainty over UK recovery, this could be the start of a slide in rates back below €1.20.
So, the market volatility continues and there is no clear indication of which direction things will take in the short term. Mid to long term, we expect the pound to increase and rates to rise, but this may not happen until late this year/next year.
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