Tuesday 18th August 2015
It’s been an interesting week in the currency markets since my last post a week ago. (Apologies for the lack of updates recently; my girlfriend managed to break her leg quite badly so I’ve had other priorities!)
In the last week we saw Sterling weaken significantly, pulling GBP/EUR rates down from €1.42 back into the €1.39’s. Today however we have seen a significant recovery, and during trading today we have seen the rate shoot back up over €1.42. After a look at the last 7 day GBP/EUR chart I’ll explain what has been causing the volatility.
Sterling/Euro over the last 7 days:
What caused the Pound/Euro rate to fall into the €1.39s?
It was a combination of poor UK economic data, positive data from Euro, and a 3rd €86bn bailout finally agreed for Greece.
Let’s start with the UK numbers. Sterling fell sharply last Wednesday as numbers showed that wage growth had slowed, reflecting a slowing of the UK’s economic recovery. In turn the numbers means it’s more and more unlikely that the Bank of England will raise interest rates this year. Investors duly sold the Pound, causing it to weaken significantly. GBP/EUR fell 4 cents in a 1 week period, which goes to show just how quickly exchange rates can change in the currency markets.
It was a different story in Europe, with figures showing that the EU economy grew by 0.3%. Even Greece managed 0.8% growth, and it seems that the ECB Stimulus program seems to be working. The Euro gained strength as a result and became more expensive to purchase.
Finally, Greece was back in the headlines but this time for the right reasons. The 3rd bailout of €86bn has finally been agreed after months of negotiations, which regular readers of my blog will be well aware of. Greece’s debt problems have been one of the main factors weakening the single currency recently, so with the issue finally sorted, the Euro gained against other currencies.
All of the above caused the decline in GBP/EUR pushing rates below the key €1.40 level.
GBP/EUR pushes back above €1.42
Pound/Euro rates fought back today however. When I returned to work this morning the rate was sat around €1.4050. At the time of writing, we have seen the pair rise by more than 1% to rest just above the €1.42 mark. This morning the latest UK inflation numbers were released and were better than expected. While still very low at 0.1% and well below the Bank of England’s target of 2%, it does mean that we could now see a UK interest rate hike sooner than thought.
One of the BoE’s Monetary Policy Committee members Ms Forbes has said that a rate hike took between one and two years to take full effect, and as a result, rates would need to rise "well before" inflation hit the Bank's 2% target.
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