Foreign Exchange Rate Forecasts: Pound/Euro & Dollar forecast for 2013

It's the first post of the year, so this afternoon I'm going to go in to quite a bit of detail on GBP/EUR rates, GBP/USD rates, look what's happened recently and where rates may be headed in the coming months.

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In recent months the GBP/EUR rate has been falling; however at the start of 2013 we saw rates pick up slightly. This wasn’t to last however, as by the end of this week the rate had started to drop again. In today's report we’ll look at the reasons why, and where rates may be headed.

The New Year ushered in a late fiscal cliff deal, and with it a resurgent euro, at least initially. Much of the focus last week was on the United States; not only due to the fiscal cliff, but also on the US debt ceiling and the country’s most recent data releases. These results have largely been the driving force behind Sterling/Euro rates and this week’s Euro report will look at how this and other events have affected the GBP/EUR cross.

The compromise between the White House and Congress’s dissident Republican faction meant that the US economy would not be automatically plunged into recession. As the world’s largest economy, the state of America’s finances will always have a peripheral effect on economies like those within the Eurozone; and as such, stalemate in the fiscal negotiations would have been disastrous for the single currency.

Late on January the 2nd the act was signed into law, close enough to the deadline to avoid any drastic price movements. The equity markets, which largely mirror the euro, responded favourably with the FTSE 100 breaking through the 6000 mark. The euphoria was short-lived however, as the following day euro strength receded as fear began to re-enter the public imagination. An undesirable side-effect of avoiding the cliff is the effect on US spending. The debt ceiling has been an issue for some time and the new taxes imposed on the wealthy are viewed as not enough to justify current public spending.

This meant that the risk-on approach adopted early in the week was side-lined in favour of repurchasing safe-haven assets, like the dollar, which had previously been subjected to aggressive selling. The shift from investors buying the euro to buying the dollar was further exaggerated by the publication of the Fed’s minutes, which hinted at an end to the QE infinity program, and by positive data stateside which would act as catalyst to a winding down of Central Bank intervention.

Friday saw a fight back from the single currency against the pound. Month on Month Italian CPI and Year on Year European CPI both exceeded expectation yet the UK’s PMI Services Index was down from 50.2 to 48.9; a score of 50 is the minimum level required to indicate growth. The move indicated that the UK economy could have contracted as much 0.2% in the final quarter of 2012 reawakening fears that our exit from recession may have been largely due to events like the Summer Games. If the UK were to fall into a triple-dip recession, sterling-euro rates could continue to fall, making the purchase of euros a more expensive process.

Time will tell whether the Conservative Party can grow an economy through cuts; what is clear however, is that Friday’s data brought negative direction to a cross that was largely range bound, but erratic, in its path.

For those needing to sell, we’re close to the best rates in 8 months; Forward contracts can lock in today’s price giving you certainty in a volatile economic climate.

Alternatively, if you have a minimum rate you need to achieve, a limit order can be placed in the market, which can be bought twenty-four hours a day, seven days a week, if the rate drops below the pre-agreed level.

As mentioned in the Euro report, the main driving force behind fluctuations in the GBP/USD rate this week has been the apparent resolution to the US ‘fiscal cliff’ problem. The fiscal cliff was the forecasted sharp decline in the US budget deficit that could have occurred at the start of the New Year, due to increased taxes and reduced spending.

The deficit—the difference between what the government receives in revenues and what it spends—was projected to be reduced by roughly half in 2013. Although reducing a country’s deficit is seen as a positive move, the associated tax increases and spending cuts were forecast to plunge the US economy back into recession and increase unemployment levels as a result.

The American Taxpayer Relief act of 2012 was signed into law by President Obama on January 2 and eliminated much of the tax side of the fiscal cliff. As a result, the safe-haven dollar fell sharply on Wednesday as investors moved away from the US currency into riskier assets.

As a result, GBP/USD hit a seventeen-month high of 1.6337. However, optimism over the US budget deal quickly waned; giving way to concerns that more budget wrangling may lie ahead. Consequently, the dollar began gaining strength with safe-haven flows driving GBP/USD rates lower. The dollar is often favoured at times of market uncertainty and as initial optimism over the budget deal was replaced with scepticism, the trend in rate movements reversed and the dollar regained the ground it had lost over the previous two days.

The greenback continued its march as the week drew to a close as minutes from the Federal Reserve’s latest meeting indicated the central bank looks set to continue its bond-buying scheme over the coming months, helping to stimulate economic growth. However, rate movements were not entirely one-directional as US employment figures caused a brief rise in Cable. However, this was only temporary with the rate sliding further as market players unwound their positions ahead of the weekend.

Overall, it was a fairly eventful week for the currency pair, with a 2% difference between the high and the low. This is considerable, considering the short trading week and the usual post-Christmas lull in activity. To put this movement into perspective, the cost of purchasing $250,000 early in the week was around £3000 less than if the dollars had been purchased on Friday.

Monday – Today’s UK data comprises of UK House Prices, and the CB Economic Index, which looks at overall economic activity and is considered as a measure for economic stability. In the Eurozone we have some inflation numbers and a measure of Investor confidence.

Tuesday – The only UK data of note are the latest Retail Sales numbers. It’s quite busy in the Eurozone however with Trade Balance data from Germany and France, EU wide Retail sales, Unemployment and Industrial orders. In the USA we have an economic optimism survey along with some consumer credit numbers.

Wednesday – Today is the UK’s turn for Trade balance figures which show overall imports and exports. In Europe we have some important GDP figures along with industrial production numbers from Germany and Greece. Further afield we have Trade Balance figures from New Zealand at 21:45pm.

Thursday – Today we have the all-important interest rate decisions from both the Bank of England and European Central Bank. We will also see the latest decision on whether the UK will increase its Quantitative Easing programme. Also in the EU today we have Inflation figures from France and Greece. We also see Greek unemployment figures. In the USA we will see Jobless Claim numbers, and speeches by some key members of the Federal Reserve.

Friday – We will see the latest GDP numbers from the UK today, along with Industrial and Manufacturing production figures. The only EU data of note is the French budget and Portuguese inflation figures. We round off the week in the states with a Budget statement and the latest Trade balance figures.

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