Foreign Exchange Rate Forecasts: Pound/Euro recovers after GDP estimate

Monday 11th February 2013
Good morning. After weeks of decline, Sterling made a modest comeback last week, pushing up from a low of 1.1475 breaking 1.18. In today's report I'm going to go into detail on what caused rates to bounce back, and also look at what the coming weeks may hold. If you are keen to know what is moving the market, in order to try and get the best exchange rates, then read on.

In this week’s Report:

Pound/Euro makes modest recovery
UK GDP estimate better than expected
Mario Draghi talks Euro down helping GBP/EUR
Round up of the week’s other data that may affect rates

Sterling vs. Euro;

This week’s report will focus on the erratic swings in GBP/EUR rates, the news and data that caused the fluctuations, and potential moves in the coming weeks. The story dominating FX headlines recently has been sterling’s rapid decline. The pound has been subject to an aggressive sell-off as fears mounted that the UK may enter a triple-dip recession, which could result in the loss of our Triple-A credit rating; and the now looming prospect of an in/out referendum on Europe for 2015, has created greater uncertainty. Last week, however, we saw the first significant retracement of this pressure and, once again, ECB President Mario Draghi was at the centre of the move.

The single currency began last week on the back foot as news broke of corruption and scandal in the Southern European States. Spain and Italy were both back in the headlines with surprising allegations of undeclared payments from a secret slush fund being received by Spain’s ruling conservative party. A petition containing over one million signatures was collected calling for the immediate resignation of Mariano Rajoy, Spain’s current Prime Minister.

This news was coupled with the announcement that Banca Monte dei Paschi di Siena, the World’s oldest surviving bank, was involved in a derivatives scandal which caused a renewed surge in Silvio Berlusconi’s fresh bid for power. This is because the aforementioned bank has strong traditional ties to the incumbent Democratic Party.

So why has this affected euro rates?

Essentially this calls on the old cliché “Markets hate uncertainty”. Under Rajoy’s stewardship Spain has placated much of the negative press it garnered towards the end of 2012. Spain were largely expected to subscribe to the ECB’s bond-purchasing program by the end of 2012 which aimed to intervene in their growing borrowing costs; yet, they have so far been largely self-sufficient, more so than Greece for example, and his resignation would threaten the current stability which aided a stronger single currency.

Though this caused a rise in GBP/EUR rates the largest swing in prices can be credited to the words of Mark Carney and Mario Draghi. The incoming Governor of the Bank of England sat before the Treasury select committee on Thursday, and in his testimony to MP’s, he outlined his thoughts and intentions for the UK economy moving forward. Mervyn King has suggested before that Quantitative easing has a diminishing rate of return, with regard to effectiveness, though Carney outlined that the BoE could expand the range of assets it purchases, whilst supporting the pound from further weakening, all without effecting the UK’s inflation target. Sterling began strengthening both before and during Mr Carney’s words.

Mario Draghi once again serenaded the currency markets with his announcement last Thursday; speaking on the euros current bull-run. He discussed the significance of the rate, with regard to growth and price stability, highlighting the dangers of a continual strengthening. His comments on inflation hinted that a cut to interest rates may not be entirely off the table; the last time such a measure was taken, we saw GBP/EUR rates surge to four year highs. His words came as a surprise to many, most expected him to touch upon the euros recent appreciation, though the announcement appeared more of a concerted effort to talk the single currency down.

UK Growth not as bad as expected

Much of the recent coverage of GBP/EUR rates appears to show the UK, seemingly, in perpetual decline and the euro storming the markets. Yet the most recent NIESR GDP estimate for the UK came in at 0.0%; better than expected, however, sterling/euro is at a pivotal point. The UK certainly is not out of the woods, despite the recent flurry of positive data, the last official GDP figures have been below forecast. If this were to happen again the false hope could be doubly damaging for the pound.

Not only this, but the euros recent appreciation has largely been built on rhetoric rather than any concrete data. Although Greece’s Finance Minister has suggested that they could begin the road to recovery by the end of the year, this remains to be seen, and if there was a cut to interest rates to stimulate the European economies, or more negative press, we could see the euro weaken again.

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Tuesday – UK data today includes Retail Sales, Inflation Data, House prices and economic index numbers. In the Eurozone there are some inflation numbers and Trade balance data for Portugal. Over in the US we have a monthly budget statement from the Federal Reserve, and a speech by one of the FED members.

Wednesday – Today we have an inflation report from the Bank of England which could affect the Pound. We have Eurozone Industrial Production measures released at 10am. In the USA in the afternoon we have imports/exports & Retail Sales. Over in New Zealand we will see inflation numbers.

Thursday – Unusually quiet for a Thursday, with no data of note from the UK. There are some GDP numbers for Italy, France, Portugal and the EU as a whole. We also have the ECB monthly report, so much that could affect the value of the Euro. The USA releases its latest Unemployment and Jobless numbers at 13:30pm.

Friday – We end the week with UK Retail Sales. In the EU we have Spanish and Greek inflation numbers, in addition to Italian Trade Balance figures. In the USA we have manufacturing and industrial production data.

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