Monday, 24 January 2011

Pound vs Euro for the week ahead

In this week’s Report:

• Sterling vs. Euro; why rates have fallen
• The dilemma facing the BoE regarding Interest Rates
• The week’s data that may affect exchange rates

(For currencies other then EUR and USD, contact us for a consultation)

Sterling vs. Euro; rates fall as UK figures disappoint

Last week started off looking like it should be another good one for the Pound, with a slight rise in UK house prices on Monday morning, and then a higher than expected jump in inflation to 3.7% (nearly twice the Bank of England’s target) early on Tuesday, which helped fuel a rise in the GBP/EUR rate to nearly €1.20 again as speculation grew that the MPC would be forced raise UK interest rates.

However any initial optimism for Euro buyers was short lived. Even the better than expected jobs figures couldn’t help the slide in the exchange rate as we moved towards the end of the week. With investors refocusing on perceived weaknesses in the UK economy they started buying back into the Euro as expectations grew that Eurozone policy makers would arrive at a more durable solution to the current debt crisis.

This was topped off on Friday morning as UK retail sales figures were released for December 2010; showing a drop of 0.8% from the expected -0.2% reading. We knew the blanketing of snow the British Isles received in December would have hurt UK retailers, but we also hoped that the VAT increase in the New Year could have perhaps encouraged people to buy before the hike and offset any drop in sales due to the weather; unfortunately, this was not the case and Sterling exchange rates fell as a result.

We have various EU data releases next week (see “This Week’s Data” section below for more info) but we should all be more interested in what’s going on in UK where midweek news could set the scene for GBP-EUR movements for weeks to come. Tuesday brings the first reading of 2010 quarter 4th GDP (economic growth) figures which are expected to show that growth slowed again. The drop is expected to come down from 0.7% to 0.5% and while it doesn’t mean we are back in recession, it could be a sign that the government cuts are starting to take effect on the economy.

This kind of slowdown in growth could lead to potential stagflation (stagnating growth and rising inflation) and would put the Bank of England in a very difficult position whereby a hike in interest rates would help to cool inflation, but could seriously hurt growth and with more austerity measures to come the economy needs all the help it can get.

The BoE minutes from this month’s meeting released Wednesday morning could give us more of an insight into their thoughts so we’ll have to wait and see, but on the flipside, better than expected UK growth figures and more bad news about debt problems in Spain and Portugal could easily help force the rate back up towards 1.20 again.

All-in-all it looks like the recent volatility is here to stay so whether you are buying or selling Euros, make sure you keep abreast of market movements by making an enquiry today.

Heed the inimitable words of Martin Luther King Jnr “Faith is taking the first step, even when you don't see the whole staircase.”

Weekly Economic Data that may affect exchange rates

Below we list the main data released for the week ahead. The implication of these will differ depending on the currency you need to buy or sell. For a free consultation on how the below released could affect your currency requirement, open an account with us today. This is free to do, doesn’t obligate you in any way, and simply means you can have a free consultation from a currency expert.

Monday
Today’s Data is mainly EU based. We have the Purchasing managers Index, which is a measure of inflation. If inflation is higher than expected, then it supports an EU interest rate hike that could push GBP/EUR rates lower. We also have Industrial Orders which measures the health of the EU manufacturing sector.

Tuesday
The most important UK figure today is the Gross Domestic Product. This is a broad measure of economic activity and shows if the UK economy is growing in line with forecasts. It often creates some volatility for Sterling. Later in the day we have some Consumer Confidence figures from the USA.

Wednesday
Today we have the BoE minutes from the Bank of England. This will show how the members voted in their recent interest rate decision. We expect volatility for Sterling. We also have a US interest rate decision from the FED. It’s likely rates will be left on hold at their record low of 0.25%. However any comments from the FED about the US economy will be closely watched by the markets and may affect GBP/USD rates.

Thursday
Today we see a raft of data from the EU so expect some movement in GBP/EUR rates. Consumer confidence, Economic Confidence and Industrial confidence are all released at 10am. From the USA we have various measures of unemployment. Jobless figures are very hard to predict and so expect some movement in GBP/USD rates today.

Friday
To end the week we have Money Supply data from the Eurozone and Gross Domestic Product figures from the USA.

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