Monday 10th December 2012
Good morning. Sterling Euro rates hit a 5 week low last week, before staging a slight recovery on Thursday and Friday. As always for a Monday, today I will take a look at what has moved the rates in the last week, and take a view on what the forecast for Pound/Euro exchange rates moving forwards.
In today's report:
- Pound/Euro hits 5 week low before recovering on Friday
- Effect of budget statement on exchange rates
- Weakness after ECB speech pulls the rate higher again
- Round up of the week’s other data that may affect rates
Sterling vs. Euro;
With last week’s Autumn Statement and data releases you would have expected substantial movement on both sides of the channel, and some significant movement for the GBP/EUR cross. Unsurprisingly with the ever so unpredictable currency markets the pair remained range bound with a 1 week movement within 0.65%. This week’s report will look at what has affected the rates and why Sterling seems to have put a stop to the recent decline in rates and strengthening Euro.
So what happened with rates last week?
Markets opened at €1.2331 last Monday with a raft of data from the Euro zone, UK and States; Sterling was seen as the best performer as with a Purchasing Managers Index (PMI) of 49.1 (predicted 48.0). Across the Chanel, the Euro zone scored 46.2 with Greece coming bottom of the pile at 41.8. Albeit positive news for the UK sentiment it didn’t actually affect the rates much as the GBP/EUR cross seemed to be awaiting the Autumn Statement from George Osborne on Wednesday with Interest rate and GDP figures out on Thursday.
What effect did the Autumn statement have?
The Autumn Statement was announced Wednesday with changes in Income Tax, Tax Relief, Capital Spending and Welfare; with the most worrying aspect being that debt reduction targets were behind schedule. This lack of progress could indicate towards a future downgrade of Britain’s AAA rating which would hinder the UK’s ability to borrow at current levels reducing the value of the pound. This could also mean further Quantitative Easing for the UK, putting Sterling at risk somewhat.
Euro weakness pushes the rate higher again
There was however some good news for the Pound/Euro rate on Thursday as President Mario Draghi said “economic weakness will persist next year”. The European Central Bank (ECB) cut its growth forecasts and the Euro weakened as the mid-market moved up 0.5% within the space of an hour; further weakness continued through Friday as the Bundesbank slashed the 2013 German Growth Forecast from 1.6% to 0.4%. The Frankfurt based central bank did say it would recover to 1.9% in 2014.
So from the 5 week low for the GBP/EUR cross, rates could come back up due to the weakness in the Euro zone. Alternatively, we could also see further Quantitative Easing (QE) out of the UK as debt reduction targets are behind schedule, and more stimulus might be required to help and bolster growth in the UK, potentially weakening Sterling. So the tug of war between Sterling and Euro continues, with no clear consensus on which direction things will go in the coming weeks and months.
So what does this mean if you are looking to fix a rate or make the most out of your funds?
If you are looking to purchase Euro’s at the moment, yes the rates have come down from the August High of €1.2878, but we're still looking pretty good at the €1.24 level. If you need to buy Euros, it's important to remember that at the end of last year you would have seen the mid-market nearer to €1.13.
A typical purchase of €200,000 would now cost you over £15,000 less! Certainly if I needed Euros, I'd be happy to trade above €1.24 and would not want to risk losing out more should the UK have it's credit rating downgraded.
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Weekly Economic Data that may affect exchange rates
Monday – There is no UK data of note today. There is however a raft of data from the Eurozone including German Trade Balance and wholesale prices, Italian Industrial Output and GDP figures, Greek inflation data and Industrial production, in addition to an EU wide investor confidence Survey.
Tuesday – Today we have UK House Price Balance from RICS. There is also a bond auction in the UK. In the Eurozone we have the German & EU wide ZEW survey on economic sentiment. Over in the United States we see Trade Balance numbers and wholesale inventories. Further afield, Australia has a consumer confidence survey.
Wednesday – It’s all about unemployment in the UK today, as we will see the claimant count, unemployment levels and average earnings data. Later in the morning we have a speech by one of the BoE’s MPC members, so this could cause volatility for Sterling. In the Eurozone inflation is the order of the day, with the latest numbers from Germany and France. Over in the USA we will see Imports and Exports, an interest rate decision from the FED, the latest FOMC economic predictions and a budget statement.
Thursday – Unusually quiet in the UK for a Thursday, with only a CBI industrial trends survey. In the Eurozone we will see inflation data for Spain and Italy, and also Greek unemployment and the ECB monthly report. There is also a European Council meeting which will discuss the debt crisis. In the states we have inflation, Retail Sales & Business inventories.
Friday – We end the week with Services & Manufacturing PMI from Germany France and the whole EU. Over in the US we have a raft of inflation data in addition to Industrial production. There is nothing of note from the UK.
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Labels: Autumn Statement, Euro weakness, Forward Contracts, Sterling/Euro forecast, Stop Loss, UK Credit Rating, Weekly Economic Data