Monthly Archives: April 2011
Is the Euro Overvalued?
It is no secret as to why the Euro is enjoying such strength at present. Following this months interest rate hike, the ECB and the Eurozone have set a precedent by raising rates. Whilst the UK and USA mire in economic uncertainty with no real current prospects of rates being raised, the Eurozone is leading the way and signalling it’s economic prowess by raising the interest rate for it’s currency. There are very high expectations of further hikes this summer, before the end of the year and next year.
Is this a wise move? Well this blog has been covering the Euro exchange rate in depth for 8 months and we have covered extensively the debt problems which threaten the Eurozone. It is now expected that Portugal will be the next country to ask for a bailout due to the dire state of it’s public and private finances. How long can this continue?
The UK and the pound are not faring brilliantly but at least they have taken measures to deal with the deficit. The US too are engaging with their deficit but the Eurozone is still having problems knowing the true extent of it’s liabilities. Indeed they keep increasing! We should factor into this comparison too the size of the US economy (which can absorb the impact of the deficit – to an extent) and the fact the US and the UK appear to be turning a corner in their recoveries. Yes the Euro have too, but will these rate hikes do more damage than good longer term?
There are many questions over the suitability of the approach by the ECB in raising rates and these will undoubtedly have an effect on the Euro rate in the coming weeks and months.
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Euro on the road to recovery
Today the euro rallied and gained by almost 0.5% against the pound and the dollar as Purchasing Manager Index (PMI) for Manufacturing showed a positive improvement for Europe. The markets expecting a contraction in growth of 0.5% but the figures showed a surprising increase of 0.2% when compared to last month. Also interestingly it showed that unemployment in Europe continued in its decreasing trend which lead to a majority of the single currencies gains today.
Tomorrow the UK releases their Bank of England minutes and the US release their new house sales figures. Both of which could change the markets significantly. If you are transferring money abroad be sure to continue to read this blog and feel free to contact us if needed. I hope you find this useful?
Greek Fears highlight Eurozone Weakness
This weekend has seen much attention drawn to Greece who is currently struggling to come to terms with the amount of debt it owes. Senior figures in Greece are openly questioning the dire straits of the country’s finances, both public and private.
It is highly likely Greece will need to restrcture it’s debts because it cannot realistically meet it’s current obligations. The market has not reacted too negatively to this news as with much of the Euro debt crisis it is to a large extent expected. GBPEUR is currently sitting at 1.1341 on the interbank which is slightly up on the low of last week at 1.1212.
Even with all the problems facing the Eurozone I still think that the Euro will remain strong, and the GBPEUR rate will remain in the low teens. The Euro as a currency has benefitted from the recent .25% rate hike and much has been made of measures to shore up the ‘problem’ countries cancelling out to an extent the debt factor is investors’ assessment of the Euro.
Despite the debt crisis being a large feature of many UK media commentator’s editorials, the reality is the Euro is still very strong particularly against such a weak Pound. If you have any upcoming euro requirements why not get in touch with us via the contact form to find out if you could save money for free!
Portuguese bail-out talks today could move the market
The Portuguese today are bracing themselves for a visit from EU negotiators today to discuss the final terms of their bailout – expected to be completed by Mid-May. The negotiations are being led by two Germans and a Dane from the IMF, ECB and European Commission.
Terms of the Portuguese Bailout are likely to include further austerity measures (something that led to Prime Minister Socrates resignation last month). How harsh and indeed how sustainable the plan is will likely make the Euro a more or less attractive proposition to speculators, with both the Greeks and Irish still struggling to pay off their debts all eyes will be on these talks today.
It is cruical that the Germans are behind the bailout in Portugal - as the average German taxpayer once again pays out for a neigbouring economy in turmoil. Furthermore yesterdays’ election in Finland saw a nationalist party possibly move into a co-alition, winning 19% of the vote. Any bailout has to be approved by all of the Eurozone’s 17 member states – and this is something that would under law go to vote in Finland. The more power the ‘True Finns’ receive the more difficult that it will make it for any future action to be taken.
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Euro continues to smash through recent highs
Yesterday the Euro was tantalisingly close to a 12 month high against Sterling as it threatened to dip below the 1.12 barrier. EUR/USD rates are also close to levels that we haven’t seen since 2009 – if we continue at this pace then we may even see 1.5 before too long.
The Euro continues to exude strength as the only of the major four currencies (EUR,USD,GBP and JPY) to have raised interest rates and have continued to push high against all these others. Many analysts had thought that the rate hike was priced in to the market when the EUR failed to push on massively after the increase was announced last week however the bullish Euro has not shown much sign of weakness.
Personally I feel the market is now looking forward to the next rate hike and I believe is very possible we see a 1.5% base rate in the Europe before 0.75% in the UK. I think this is a key driver to GBP/EUR and a major one also for EUR/USD. Notably the US economy seems the furthest behind in terms of looking to raise rates as they continue to struggle out to pick up their feet.
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Eurozone and US Inflation Data
The latest speculation for the Eurozone is when there will next be a rate hike. With this month’s hike cementing recent gains for the single currency we have some inflation data today that could prove crucial as to when we may next see a rate hike for the Euro.
High Inflation was cited as one of the reasons to raise the Euro interest rate and investors are now speculating as to when we will next see a further increase. Some speculate it could be as soon as June in a series of increases, other feel it will be one larger rise – say 50 bps, by August.
Whenever it happens inflation will be one of the key drivers on the decision so today’s data is important. More recently with the pound we have seen the sterling rate fluctuate more when inflation data is released than when we get the actual interest rate decision. This is because the markets are generally aware of impending rate hikes whereas inflation data is more difficult to predict.
Today at 10.00 we have European CPI Inflation Data and at 13.30 US CPI Inflation. This is a measure of the change in of the price of goods in the Consumer Price Index which is generally one of the most widely used inflationary data sources, particularly by governments, which could be key to any interest rate decisions.
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Portuguese Bailout still fails to move the markets
In the wake of the Portuguese bailout the Euro has remained mercilessly strong against the majority of majors. The Euro is now exceptionally close to a year long high against the Pound and at a 15 month high against the US Dollar.
In light of the Portuguese bailout it is surprising to me that the Euro is at such high levels. Although the ECB have been the first to move away from holding their interest rates at record lows, Sovereign Debt continues to cast a rather unpleasant shadow over the entire zone.
However whilst sovereign debt continues to not affect the market I can still imagine Euro pushing a little further against both Sterling and the Greenback. If you have any currency requirement then make sure you are in regular contact with your Currency Broker to make the most of these market movements.
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What is the impact of the Interest Rate hike on the Euro?
Obviously there is no crystal ball in the markets but this blog will take a look at how an interest rate hike may impact on the Euro-zone, looking at individual states and the zone as a whole. Trichet continued to state that they would need to take a ‘strong, vigilant’ policy against inflation and the markets are beginning to re-evaluate the Euro as there may be another two rate hikes this year.
Firstly let’s get the facts straight - a quarter point hike is by no means a radical rise, bringing rates from 1% to 1.25% is only a natural move as the zone begins to take it’s first baby steps towards a full recovery. It is also likely to help its thriving states – in particular Germany, by far the dominant economy in the zone which should in all theory help the Euro. The French too will not be dissapointed as one of the better performing states and possibly something that Jean-Claude Trichet, the French head of the ECB possibly had in mind when pushing this decision forward. The Southern states (in particular the PIIGS) though wouldn’t have been too excited when they heard the news that the interest rate had risen.
Eurozone problems
In the wake of the Portuguese bailout, following the Irish and the Greeks,market attention now veers toward Spain. Unlike these other economies the Spanish position poses a real threat to the zone and the Euro as a whole. It is the 4th biggest economy using the Euro and following three other bailouts the European Financial Stability Fund would really struggle to cope. An interest rate rise is particularly dissapointing for Spain as a whole, 85% of their mortgages are variable – even such a small rise in interest rates is likely to cost the economy multiple millions in terms of lost spending. Confidence in the economy and general public spend is hugely important to an economic recovery and so the impact of a rate hike will hit all areas – the public, small businesses, big businesses and the government.
This highlights a huge weakness of the zone as a whole from a ‘single policy fits all’ concept that they have adopted. To manage the likes of Germany and France at the same time as Spain and Portugal is much like trying to manage Manchester United and the local sunday league team under the same tactics and strategy, in the long run it just won’t work!
Fairly recently the Europeans tried to centralise more policy in order to avoid future bailouts – at least some evidence of more long term thinking. Simply put, governments need to stop spending and start saving. Unpopular though it may be, it is the only way for the likes of the Irish, the Greeks and the Portuguese to naturally regain some true economic strength. Conversely at the moment each bailout comes with a high rate of interest that these countries can ill afford, to quote a cliche they seem to be digging themselves into an even bigger hole.
With all these difficulties I would say that the long term future for the Euro is perhaps more worrying than any other currency at the moment and given the levels we are currently at, particularly after a Portuguese bailout it is an extremely attractive time to look at selling Euros. If you would like a more detailed explanation of how the interest rate hike is likely to impact the Euro, particularly in the more short or medium term fill in the form to the right and one of our dedicated currency brokers will be attached.
EURO Interest rate rise
This afternoon Euro came through on their promises and actually raised the interest rate by 25 base points, a quarter of a percent. This as mentioned across www.eurorateforecase.com was widely expected by the market and had been widely priced in over the last 2 weeks. This resulted in very little change in exchange rates as the euro gained strength against the dollar and the pound following the confirmation.
The UK Bank of England (BOE) also released their interest rate decision earlier today with no change. As always it will be interesting to see the vote released in two weeks time in the meeting minutes as to who voted for what. This split between the 9 members will change speculation as to when the BOE will change rates.
Portugal confirms bail out
Late last night news broke that Portugal put their hands out and asked for a bail out. The concern is how much this will cost, initially it added to concerns that the interest rate would not change. Costs to the UK are being estimated as £3bn to £6bn. So we will watch as this story develops and changes the GBPEUR pairing. The key question will be whether they negotiate a package that will either temporally seal or stop completely the leak in their economy?
