Monday 28th January 2013
Good morning. Well last week was a very disappointing one for the Pound, with GBP/EUR rates falling to a one year low due to poor GDP figures. Today’s
report will consider the dramatic fall in sterling/euro rates that has
occurred recently. We will examine the effects of the UK’s forecast and
announced GDP figures, EU data, Bank of England policy, as well as,
David Cameron’s recent speech on Britain’s role in the EU. I'll also look at how you can protect against further falls.
In this week’s Report:
- UK GDP disappoints at -0.3%
- Pound/Euro at 1 year low
- Pound/Dollar at 6 month low
- Round up of the week’s other data that may affect rates
Sterling vs. Euro falls to 1 year low; How and When Did this Begin?
Sterling euro rates have been subjected to a perfect storm with regard to news and data as of late. GBP/EUR had fallen away from the summer highs but appeared settled in the low to mid €1.20’s; this was before the European Central Bank's (ECB) interest rate decision and the initial predictions for Britain’s Gross Domestic Product. The spike in sterling/euro rates this summer was due to an interest rate cut by the ECB. Interest rate cuts can be used by Central Bankers as a means to stimulate the economy and the ECB used one of the major tools in their arsenal.
The well-publicised issues in Greece, Spain, Portugal, Italy, and even France, left many euro-bears expecting a similar cut to rates at the beginning of this year which would prompt another round of euro weakness. Yet when Mario Draghi took the stage to announce the ECB’s decision earlier this month, not only did he leave rates unchanged, he offered a far more positive prediction for the Eurozone in 2013. This initial piece of euro-strength saw a drop in rates which was compounded by the news that the UK was forecast to have contracted in the final quarter of 2012.
GDP figures cause Pound to fall even further
The announcement came at 9:30 last Friday; the official figure was -0.3%, and the contraction prompted a significant drop in rates; a 10.2% drop in mining and quarrying was one of the more significant contributing factors. There was a degree of trepidation when Britain exited recession in quarter three of last year; there were many claiming that the growth was mostly due to anomalous events, such as the Olympics, and once that artificial stimulus was over we would continue down a similar path.
Unfortunately there is little continuity with our current coalition government; particularly when last week Nick Clegg, in typical dissenting fashion, publicly declared that capital spending cuts were a mistake. With continual U-turns and no discernible consensus on policy, other than anti-EU rhetoric and deficit reduction speeches, there is a genuine fear that the coalition may have led the UK down a very rocky road to recovery indeed. Markets are never fond of uncertainty and the poor data and lack of congruent direction have been a major factor in sterling’s recent decline.
How Has Data From the EU Affected the Rates?
Despite the recent ECB positivity Europe remains an incredibly polarised continent. This was particularly evident last Thursday where two very different sets of data caused brief swings in the rates. French PMI came in much poorer than expected and Spanish unemployment continued to grow; now at a staggering level of 26.02%.
The data was a brief reminder that there are still significant problems in the Eurozone and it was only last year that Citi were predicting a Greek exit from the Eurozone and Spain to apply to ECB’s bond purchasing program by November. Once again Germany rode in to the rescue; a less than expected contraction in manufacturing and growth in services PMI saw the single currency retrace the ground lost by its constituents’ weaker counterparts.
What Could the Bank of England do to Intervene?
The most recent Bank of England minutes revealed a unanimous vote to keep interest rates at the current level and Mervyn King has spoken at length about the pros and cons of quantitative easing. Governor King has outlined that that particular form of monetary policy is subject to the law of diminishing returns; in short this means that the more the BoE do it, the less effective it becomes. On this matter all but one of the deciding members opted to leave QE on hold.
There is now the risk however that more QE will be needed given the recent figures, and this would weaken the Pound and potentially cause exchange rates to call even further.
David Cameron’s Speech on Europe
Last Wednesday David Cameron stood at the Bloomberg offices in London to announce he was to propose an in/out referendum for the UK on Europe. The crux of his argument was that he intended to renegotiate Britain’s seat at the European table; with many wondering how much of it was simply a ploy to keep Nigel Farage and the Tory Euro-Sceptic Motley at bay.
John F. Burns, writing for The New York Times, described the announcement as a “giant political poker game” and it appears Mr Cameron has gone all in. Former Prime Minister Tony Blair called the move “holding a gun to his own head” and whilst a referendum could be beneficial to the UK the implications of Britain exiting the EU are unclear and could be very damaging. Blair’s comments will have referred to the fact that the referendum is not due until 2015 and the uncertainty will be detrimental to sterling and the UK economy; but also, there seems to be an obvious self-motivated element.
Cameron’s popularity will likely increase with those in the UK harbouring anti-EU sentiments; as there are surveys that suggest UKIP have moved to third in the polls ahead of the Liberal Democrats. Also, the referendum is conditional on the Conservative Party, and Cameron, remaining in power after the next general election.
What Can I do About It?
Despite all the doom and gloom for the UK there are way you can maintain a level of control of your finances; if not your government or the markets. If you will need to purchase euros, and are worried the rate could continue to fall further, you could enter into a forward contract that lets you lock in today’s rate which would only require you to lodge a 10% margin against the total amount you want to convert.
Alternatively you could use a stop loss that allows you to buy the euros 24/7 if the rates falls below a pre-agreed level. If you are selling euros the rate has certainly gone in your favour; it is important to keep in mind that market movements are fickle and if there is another well-publicised issue in the Eurozone we could see these gains retraced.
Limit orders allow you to set an optimistic level in the market which, like the stop-loss, can be bought any time of any day if the level is triggered. Certainly with this much market uncertainty it is worth taking a free consultation
Quote 'AJABLOG' when you get in touch.
Weekly Economic Data that may affect exchange rates
Monday – There is no UK data today. In the Eurozone we have German Trade Balance numbers in addition to Retail Sales. The USA releases its most recent home sales data and Durable Goods orders. Further afield New Zealand has trade balance numbers at 21:45pm.
Tuesday – Again nothing today from the UK. In Europe we have German & French Confidence measures, Spanish Retail Sales, and Greek inflation data. The US also has confidence measures.
Wednesday – The UK today releases consumer credit numbers, Mortgage Approvals and Lending data. In the
Eurozone we have a Spanish GDP estimate, Italian business confidence measures, and a German bond
auction. We also see Portuguese Consumer and Business Confidence. In the states we have GDP numbers,
Mortgage applications, and an interest rate decision. New Zealand also has an interest rate decision at 8pm.
Thursday – Fairly quiet in the UK with only House Price data being released. In the Eurozone we have various inflation measures from most countries, in addition to German unemployment. The USA also releases unemployment numbers and inflation data. We also see the most recent GDP numbers from Canada.
Friday – It’s been a very quiet week for the UK, and today is no different; manufacturing PMI is the only release of note. In the Eurozone we have inflation number; unemployment figures. In the United States we have unemployment, inflation data, construction spending, consumer sentiment, and Non-Farm Payrolls.
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Labels: Bank of England, Best Exchange Rates, David Cameron, Pound/Euro 1 year low, Pound/Euro forecast 2013, Quantitative Easing, UK GDP