Friday 15th June 2012
Good morning everybody. Why has the Pound fallen against the Euro this morning? Things can change very quickly in the currency markets, and in my last post GBP/EUR rates were getting close to €1.25. The facts have now changed, and so has the exchange rate; the Pound has fallen sharply this morning, after The Bank of England announced yesterday evening that it will launch two new stimulus packages in response to the worsening economic outlook:
Sterling falls sharply on news BoE to pursue more stimulus
When the markets opened at 8am this morning the reaction was severe, and Sterling has dropped sharply across the board, as the chart above shows.
In the new developments, it was announced that together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies. Banks will also have access to short-term money to deal with "exceptional market stresses". The chancellor said the measures would "inject confidence".
In the announcement, the governor Mervyn King said that "We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep,"
Indeed on this blog I have been warning for some time that the EU debt crisis could well start to affect the UK, and this is what we are now seeing.
The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, hoping that the institutions that sell bonds to the Bank then use the money to buy up other assets, but that hasn’t always been the case. Some have said that they have held on to the money undermining the effectiveness of QE. Regardless the additional currency in the system has weakened the Pound in recent months.
You can read more about the £140bn scheme to kick-start stagnant economy here on the telegraph website.
Euro crisis deepens and affects Spain
As expected, Spain is the latest country to be dragged into the debt crisis, having earlier in the week taking a €100 billion bailout of its banks. Yesterday it was seen that Spain's borrowing costs hit 7% which is a level widely seen as unsustainable. Italy's borrowing costs also rose sharply meaning we could now see bailouts for these two countries.
Greek elections this weekend
With Greek elections taking place this weekend in what is being seen as a referendum on the euro, analysts have warned of potential further shocks to the financial sector. If the anti austerity Syriza party succed, then they may well effectively be voting themselves out of the single currency.
What is certain is that whatever happens this weekend, the market reaction on Monday morning is likely to be quite severe, as for many weeks investors have been waiting for this event before deciding what to do with their currency.
On Monday I will post a full analysis of the results, and what the Greek elections could mean for the Pound/Euro exchange rate forecast.
Pound/Euro exchange rate forecast
Many clients have been convinced that the Euro debt crisis would continue to weaken the Euro making the GBP/EUR exchange rate higher. Indeed on this very blog I have been warning for some time that this may not be the case, and in fact the UK is not immune to the EU’s problems. Sterling is at risk of falling if more stimulus is needed. This is now what has happened, and the 3.5 year highs seen recently now seem a distant memory.
Where rates will go moving forwards is impossible to predict, but with so much uncertainty surrounding the UK and EU economies, rates could go either way. Currently there is not much support for Sterling in the wake of yesterdays announcements, and so in the short term I don’t expect rates to rise back to €1.25 any time soon. I would expect rates to stay in the €1.22 to €1.2350 range for the moment, but on Sunday when the election results are seen, I'm sure the market will correct accordingly. Of course I will post a full analysis of what the election results mean on Monday morning.
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Labels: BoE stimulus, Greek elections, Pound falls, Pound/Euro exchange rate forecast
When the markets opened at 8am this morning the reaction was severe, and Sterling has dropped sharply across the board, as the chart above shows.
With Greek elections taking place this weekend in what is being seen as a referendum on the euro, analysts have warned of potential further shocks to the financial sector. If the anti austerity Syriza party succed, then they may well effectively be voting themselves out of the single currency.