Tuesday 17th January 2012
Good morning. It was a very flat day on the markets yesterday, despite the downgrade of EU countries over the weekend by S&P. Pound Euro remained range bound just below a 16 month high, and Sterling Dollar remained around an 18 month low. This is all due to the EU debt crisis, with the downgrade keeping the Euro weak and the Dollar strong. The charts below show how rates moved throughout the day yesterday :-
~Currency Movements on Monday 16th January~
Eurozone credit rating downgrades
As you can see, there was little movement at all, and through the whole day the cost of €100k only varied by around £150. Very very quiet indeed compared to what we have been used to of late, however there is much happening this week that could change things.
Ratings agency Standard & Poor's last week downgraded the credit rating of nine euro zone countries including France and Austria after the close of London markets, however the rumours had been circulating all day, and as such there wasn't a huge reaction in the currency markets. The Euro had already weakened on the rumour, and as the news came when markets were closed there was little effect on exchange rates.
The news came as negotiations between Greece and private creditors on a debt swap deal broke down, raising the risk of a messy Greek default. What the downgrades do show however, is that global investors are now wary over investing in the Eurozone, and instead look for the safe haven US Dollar. The net effect is a weaker Euro (and therefore higher GBP/EUR rates) and a strong US Dollar (and therefore lower GBP/USD rates).
Sterling Euro is still very close to a 16 month high, however Sterling/US Dollar is near an 18 month low. Germany has retained its AAA credit rating, as the UK does. In the short-to-medium term the UK may benefit a little bit from being a triple-A rated sovereign but I think that will be called into question during 2012 as well, especially if we see further Quantitative Easing in February.
UK also affected by Eurozone debt crisis
It's important to remember that bad news for Europe doesn't automatically mean higher GBP/EUR rates. The UK is intrinsically tied into what happens in Europe. Indeed Sterling has benefited from safe-haven flows as investors that don't want to be exposed to EU debt bought UK gilts instead. The yield on British 10-year gilts fell to within a whisker of a new record low on Monday after the S&P downgrade reduced the pool of European triple-A rated sovereigns. This on it's own shows that there is some safe haven demand for the Pound.
However, some strategists said the fact that Germany, the euro zone's largest economy, was not downgraded could prompt some of those flows to be diverted into Bunds and remove a pillar of support for the pound. Overall, market players said more instability in the euro zone, the UK's largest trading partner, could spell trouble for sterling.
There were various news stories circulating yesterday predicting UK interest rates will stay low for some years to come, and that the UK is headed back into recession.
Summary - when should you buy/sell your currency?
There is much uncertainty in global markets at the moment. There are some factors that support the case that the Euro will continue to weaken, pushing GBP/EUR higher, however many analysts say the Pound will also weaken.
With so much uncertainty, nobody can predict which way exchange rates may move during 2012. There are however various ways we can help protect you against rates moving the wrong way, and strategies you can employ to help you achieve the best rate.
If you need to convert one currency to another, the amount is £5k+, and you need the funds wired to an account anywhere in the world - contact me now by clicking here. I can provide you with a free consultation on the options available to you, and ensure you make the most of your currency.
Today's Data
There is a host of UK inflation data out at 09:30am, in addition to Retail Price Index measures. The EU also has some inflation numbers, which could affect where interest rates move in February. Staying in the EU, there are various German measures of Economic confidence. Finally, an interest rate decision in Canada rounds off the day.
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