Thursday 8th December 2011
Good morning. So why did the exchange rates go up so suddenly yesterday? There was a significant increase in Sterling exchange rates, with Sterling/Euro rising by over 1% before falling back away slightly. The Euro was knocked by comments from a German government official which tempered optimism over a comprehensive solution to the euro zone's debt crisis at this week's EU summit. This weakened the Euro significantly, and also strengthened riskier currencies such as Sterling.
The below charts show how the Pound fared against the Euro and US Dollar yesterday, showing the significant jump in rates after the comments:
Pound/Euro rates gain significantly on EU summit concerns
The current exchange rate movements are being driven by swings in sentiment ahead of the EU summit which begins this evening, with EU leaders trying to agree on a solution to the debt crisis that has been affecting exchange rates for some time now.
The comments yesterday cast doubt whether a solution will be found, and it shows that Germany is increasingly pessimistic about the chances of a deal to solve the euro zone debt crisis at the summit this week. The official said that because some governments don't seem to grasp the gravity of the situation, a solution is unlikely to be found.
This caused weakness in the single currency, and Sterling exchange rates gained by over 1% - a big gain in just one day. To put this into perspective, buying €200k at yesterdays high compared to yesterdays low would save you £2000.00.
"For sterling it's all about the headlines coming out regarding the EU summit at the moment which are proving very difficult to trade," said Kathleen Brooks, research director at FOREX.com.
Sterlings gains are despite continuing concerns over the UK economy
British industrial output fell more than expected and at its fastest pace in six months in October, according to data released yesterday. This has increased concerns that the economy may drop back into recession after a run of weak economic data.
"October's official UK industrial production figures are even weaker than we or the consensus had expected and suggest that the risk that the overall economy re-enters recession in the fourth quarter remains high," said Samuel Tombs, economist at Capital Economics.
So as has been the case for some time, the Pounds value is being driven by events in the Eurozone. With a solution to the crisis now seeming unlikely, riskier currencies such as Sterling are benefiting as investors do not want to hold funds in Euros, and the demand for the Pound is the reason for the increase in exchange rates.
Today's Data
Earlier in the week we saw interest rate decisions for New Zealand, Canada and Australia – today is the turn of the UK and EU. They will announce any change in interest rates, and whether they will pursue any Quantitative Easing. It could be a volatile day for GBP/EUR rates. Later in the day, the USA released various jobless and employment numbers.
Summary
The gains seen yesterday have pushed GBP/EUR rates back to a near 9 month high. This has happened several times in the last few months, and each time it doesn't last at these levels for very long, as any negative data regarding the UK economy can quickly pull rates back down again.
If you need to buy Euros, consider taking advantage of the spike while it is here. We have various types of currency contract that let you fix the current rate, even if it will be some time before you need your currency.
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