Monday, 5 November 2012

Pound/Euro exchange rates best in a month

Monday 5th November 2012
Good morning. Pound/Euro rates have recovered well over the last few weeks, hitting their best in over a month. This is mainly due to a raft of better than expected economic data from the UK, lessening the chances of further Quantitative Easing and giving the Pound a boost. In today's report I'll take a look at what the forecast is for Sterling/Euro rates, and what data to look out for this week that could affect exchange rates.

In this week’s Report:

•    Pound/Euro rates hit one-month high
•    Pound performs well against a basket of currencies
•    Round up of the week’s other data that may affect rates


Sterling vs. Euro; 

Last week the pound rosewell  against the euro, hitting its highest levels since the beginning of October, breaking through the 1.25 level on Friday before finishing down around 1.2480 where we remain this morning. As well as the recent better than forecast GDP data showing the UK is no longer in a recession, we have seen mortgage, retails sales and consumer credit data all come out better than expected.


Less chance of Quantitative Easing from the BoE

All of these recent releases suggest there will be less chance of the BoE pumping more money into the economy via the QE program. (Pumping more funds into the British economy would effectively dilute the pound, bringing the GBP/EUR rate down). This was supported by MPC member Charles Bean last week who said he believed the successive rounds of QE by the BoE has led to a drop in bond yields and an increase in equity prices. However, he was less certain at this stage of the effect that lower yields will have on demand for government bonds and even stated there were reasons to believe the effect of lower yields in boosting demand may be weaker than usual.

These comments only corroborated the belief that he will vote against further QE at the November MPC meeting this Thursday. Another reason for the rise in exchange rates is the continued uncertainty around the euro countries’ ability to deal with the ongoing financial crisis and the doubts surrounding the future of Greece and Spain within the Euro. Spain reported a 5th successive quarter of negative growth, reporting a -0.3% contraction in Q3. This weakened the Euro and has compounded the increase in rates.

Spain's woes continue

Many analysts believe that the actual numbers from Spain could actually be much worse than the release suggests. This is because people were bringing forward purchases to avoid the VAT increase in September. This also helps explain the Spanish retail sales figures which were down by -10.9% when they only fell -2.0 in august.

Even with good news from the Eurozone, in the form of the German economic minister’s prediction that the German economy will grow by 0.8% in 2012 and 1% in 2013, the euro still failed to gain any significant strength. The UK just mirrored these predictions when The Confederation of British Industry raised its UK growth forecast to 1.4% in 2013 from a previous 1.3% forecast, and said growth in 2014 could reach 2%, meaning this had little effect on rates.

Looking ahead, the main mover of rates this week, other than the BoE and ECB rate decisions on Thursday, will be whether Spain will ask the EU for further assistance in the form of a bailout, which has been widely expected for some time. If Spain does secure a further bailout, it would actually be good news for the EU, and therefore we could see confidence increase in the single currency, strengthening it against sterling and pushing the rate down.

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Weekly Economic Data that may affect exchange rates 

Monday We start the week with Spanish unemployment figures, Eurozone investor confidence measures and services PMI from the UK. We also have non-manufacturing PMI from the US. 

Tuesday Focus will be on the US on Tuesday with the presidential elections taking place. We aslo have a raft of data from the UK and Eurozone. We start the day with Spanish and Italian services PMI followed by services PMI for the Eurozone as a whole. We then have manufacturing and industrial production figures from the UK with a ten-year bond auction. From the EU we have German factory orders. 

Wednesday A quieter day for data releases on Wednesday, we have no data of note from the UK. In the US we have a ten-year bond auction and over in Europe we’ll see the release of German Industrial Production figures and retail sales for the Eurozone as a whole. 

Thursday Another busy Thursday this week with key announcements from the Bank of England, including an interest rate announcement and a decision over another round of quantitative easing. There’s also a European Central Bank press conference coupled with an interest rate decision. From the States we have trade balance and unemployment figures. 

Friday A quiet end to the week with minor data releases of little significance. From the US, we have consumer sentiment and inflation expectations. No data of note from the UK with French and Italian industrial production figures from the Eurozone.  

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