Wednesday, 31 July 2013

Why has Pound fallen against Euro? JUL/AUG 2013

Wednesday 31st July 2013
Good afternoon.  Sterling has not had a very good run in the last few weeks, and exchange rates have continued to fall since my last post. This is a bit of a surprise, as the most recent economic figures for the UK have actually been pretty good. It’s all down to speculation on what the Bank of England will do with interest rates, and in today’s report I will explain why the Pound has been falling against the Euro to the lowest rate since February. In today’s post:

  • Why the Pound has fallen against the Euro
  • How will the Bank of England move forwards?
  • What data releases could affect rates in the next week?
  • Find out how good our exchange rates are. 

Why the Pound has fallen against the Euro? 

The Pound has fallen to its lowest levels since February, and at the time of writing GBP/EUR rates sit at 1.1425. Just a few months ago rates were approaching 1.20. In some respects it’s quite a surprise the Pound has fallen as there have been some decent economic numbers out of the UK. Let’s take a look at these in more detail… 



Above shows the decline in GBP/EUR rates over the last 3 months. Last week we saw the latest UK GDP figures. These showed that the UK economy is "on the mend" after figures showed it grew by 0.6% in the three months to June.  The latest growth estimate implies that the economy has now recouped almost half of its total 7.2% contraction during the 2008-09 recession, with output remaining 3.3% below its pre-recession peak. 

Great, so good growth means a strong Pound, right?

Not necessarily, and this hasn't been the case this week. The growth figure was in line with market expectations, and share prices on the London Stock Exchange did not react to the news. However, the pound did drop on the currency markets. This was partly due to some market participants believing the data may support further monetary intervention by the Bank of England. Mostly though, the numbers gave little reason to buy the Pound. Some thought the figure would be above 0.6% and because the numbers weren’t a surprise, Sterling lost value. 

This trend has continued with the Pound falling most days since, mainly due to speculation on what the Bank of England will do to keep growth going.

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How will the Bank of England move forwards?

At the most recent bank of England meeting all 9 members voted against more Quantitative Easing. This indicates that in the short term at least, there will not be any further money pumped in to the economy. Again you would think this would strengthen the Pound, but you have to look at what other tools are left in the box now QE is off the table. 

The tool kit is very thin to say the least! Another good explanation for the drop in rates is speculation the Bank of England are going to announce tomorrow (Thursday) some "guidance" on the future of interest rates; specifically, that it will set out a framework to keep rates at near-zero levels for up to 4 years. So, investors are dumping the Pound ahead of this. Keeping rates at near zero is all they can do. 

This would mean little return for anyone holding Sterling, and so despite better economic figures, the Pound has fallen as a result, and could well continue to do so. At 12pm tomorrow we will see the latest decision from the BoE on interest rates and QE. 

While I don’t expect any change for either, watch for any accompanying statement from the governor that may dictate future moves, as this could impact on the value of the Pound. In 2 weeks’ time we will see the minutes from tomorrow’s meeting to see how the 9 members voted, and if all 9 are still against QE. 

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What data releases could affect rates in the next week? 

Thursday 1st August – The BoE and ECB both announce their interest rate decision. There are also some inflation numbers from the Eurozone. IN the USA we have jobless numbers and inflation data. 

Friday 2nd – We will see UK House prices today, which are a good barometer of overall economic activity. Most data today however is from the USA – Non Farm Payrolls, Earnings and Unemployment data. 

Monday 5th – Lots of numbers from the Eurozone today, mostly comprising inflation, but also Retail Sales and investor confidence measures. The UK releases its Retail Sales numbers. 

Tuesday 6th – Today is busy in the UK, with Industrial Production and Manufacturing numbers being release, in addition to Trade Balance numbers. At 2pm we have a GDP estimate, which could well move the Pound. 

Wednesday 7th – It’s the Eurozone’s turn for Import and Export numbers today. The only UK data of note is House Price data. And the Bank of England inflation report. 

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Find out how good our exchange rates are. 

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