September was always going to prove to be a defining month for the Eurozone. Market confidence in the euro has eroded over the past 12 months and it was clear that sooner or later something had to change to alter the current landscape but more importantly the public perception surrounding the entire eurozone region. Whilst I cannot say with full confidence that this moment has arrived, what is clear is that for the first time in months the euro has found some substantial support. ECB President Mario Draghi, announced last week a fresh government bond-buying scheme, aimed at helping to alleviate the current debt crisis and protect the eurozone from similar fall-outs in the future. The markets have reacted very positively to the announcement, with the euro fighting back against all major currencies for the first time in months and gaining over 2 cents against GBP in the past week.
There are still a number of issues to resolve, including the Spanish banking crisis but reports already suggest a full scale bailout will not be required. Greece is also coming under the spotlight once again this month and any decision on an extension to their debt program may have a significant impact on GBP/EUR exchange rates. We are far from a full scale recovery but there are some positive signs and the most important task now is for EU leaders to work to gain market confidence in the medium to long-term.
Is GBP still over-valued against the euro?
In my opinion Sterling could still be considered over-valued against the euro, even allowing for the single currencies recent fight back. The UK economy continues to stagnate with PMI data consistently poor and the Bank of England having cut growth forecasts on almost a monthly basis. We have seen multiple rounds of Quantitative Easing to try and boost lending but with our banking sector causing more problems than they are solving, it seems to have made little difference. Even with the slight reduction in our trade deficit (it was the widest since records began), I anticipate the Pound to come under increasing pressure against the single currency over the coming months.
However, despite all of the negatives, we are still not too far away from the four year highs that we experienced only recently on GBP/EUR exchange rates and for this reason I still think current levels represent good buying opportunities and one of our forward contracts will protect you from further negative GBP movement.
Anyone potentially buying euro who anticipated 1.30 may be left disillusioned unless there is a shift in public perception on the UK economy and/or further fall-outs in the Eurozone. I feel the EUR will continue to find resistance around 1.25 as we are witnessing, whilst any positive move for GBP may be dependent on the outcome of further reports from Spain and Greece.
The euro has continued to perform well against the USD and has moved well away from the all-time lows we experienced during the summer and show no signs of relinquishing this position anytime soon. Current levels are sitting at 1.2886 and were boosted by Mario Draghi’s statement last week and the on-going uncertainty surrounding the US economy and the upcoming elections. Personally I feel it is only a matter of time until we reach 1.30 so anyone holding USD and wishing to purchase EUR may wish to consider their positions.
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