Monday, 26 November 2012

Pound/Euro forecast; rates could drop further

Monday 26th November 2012
Good morning. The Pound/Euro exchange rate fell quite a bit last week, and the forecast is for this to continue. This is partly due to events in Europe, but also due to the fact the Bank of England governor is speaking again this week, and could well talk the Pound down further. So what have I got for you in today's post?
 
In this week’s Report: 
  • Pound/Euro rates in decline last week
  • Bank of England speech this week could weaken Pound further 
  • EU fails to resolve Greek/EU debt issues 
  • Round up of the week’s other data that may affect rates
Sterling vs. Euro; 

Pound/Euro rates last week were largely dominated by discussions between the IMF and EU Finance Ministers, over a €44 billion Greek bailout. The single currency strengthened considerably, due to the optimism of the aforementioned plan, but was clouded mid-week by continued disagreements between the two deciding factions. As you can see by the chart below, rates have been in decline now for a few weeks. 


Reports on Monday last week outlined that an agreement was expected the following day that would allow Greece to access the bailout monies allocated from December 5th. However, following a twelve hour meeting no solution to Greece’s debt problems could be met, prompting Christine Lagarde to say that the meeting had yielded progress but the technical details could not be ironed out. 

The euro, which had been steadily strengthening due to the meeting’s publicity, retraced part of its gains as speculators were reminded that solving the region’s debt-crisis cannot be done by simply releasing bailout funds. 

What caused the Greek debt crisis?
 
The Greek crisis emanated from enormous borrowing which grew exponentially since joining the euro. Public spending soared after adopting the single currency; costs which were not offset through taxation, largely due to widespread tax evasion, making it impossible to balance the books. When the Global Financial Crisis occurred it wiped the foundations from Greece’s house of cards, and essentially made it impossible to repay their lenders due to the staggering debt-levels they had accumulated. 

The high emphasis on a Greek rescue stems from a fear of contagion. Contagion is the notion that if Greece were to default on their debts, a similar cycle of events could affect countries like Spain, Italy and Portugal. The cause is a result of the fear that these countries could follow Greece’s example and default on their obligations. 

Not only this, but the losses associated with a Greek default would significantly dampen Global liquidity; in a nutshell, when people are fearful and refuse to spend, economies become stagnant. Talks are on-going which for the GBP/EUR rate means that an agreement could see the rate drop further as the euro strengthens. However if there are more delays or compromise can be met, this could see the rate bounce back as the single currency will weaken. So things really could go both ways in the coming weeks. 

Mervyn King could talk the Pound even lower

One argument for rates dropping further, is a continuing weakness in Sterling. The Governor of the Bank of England is speaking on Thursday and is largely expected to pour cold water on Britain’s economic progress, as he did a few weeks ago. Many believe that this is an attempt to weaken the pound as a ploy to increase our competitiveness in the export market; as the EU is major trade partner. This comes despite some positive data from the UK which saw momentary retracements on the euro’s strength last week. 

How to protect against the rate dropping

If the euro is your currency of interest, send me a free enquiry and I can get in touch to discuss your options. If the Market appears to be moving against you, Forward Contracts and Stop Orders are great ways of protecting yourself from adverse Market movements. If the rates are going in your favour, Limit Orders allow you to set an optimistic level in the Market which can be automatically purchased, 24 hours a day, seven days a week. 


Weekly Economic Data that may affect exchange rates 

Monday The main data that could affect GBP/EUR rates today is from Germany. We have a host of data from Europe’s largest economy, including Retail Sales, Import Prices and a Consumer Confidence Survey. Staying in Europe, we also have the EcoFin meeting, which covers areas such as coordinated economic measures, budgetary policies, public finances, capital movements and financial markets. Elsewhere we have Trade Balance figures from New Zealand, and manufacturing data from the USA. 

Tuesday An important day for the Pound, as we will have GDP figures, House Prices and Business Investment measures. There is nothing major from Europe, but across the pond we’ll see US House Prices, Consumer Confidence, and Speeches by various members of the Federal Reserve. 

Wednesday Nothing from the UK today. We do have some German inflation figures along with Spanish Retail Sales. IN the USA we will see some further Home Sales data, which is a good barometer of overall economic health. 

Thursday A fairly busy day today. Starting in the UK we have Consumer Credit, Mortgage Approvals, and a Speech by the Bank of England governor Mervyn King. Be very mindful of this, as last time he spoke he talked the Pound down by a significant amount. It’s followed by a UK Financial Stability report. In Europe we will see Consumer Confidence, Economic Confidence, Industrial confidence along with German unemployment numbers. In the states we have Jobless Claims, Homes Sales and manufacturing numbers. 

Friday The only UK data of note is consumer confidence and an inflation report. In the Eurozone we have Inflation numbers, unemployment numbers and Retail Sales. We end the week in the Americas with inflation numbers from the USA and GDP figures from Canada.  

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