I was actually out of the office during the back end of last week – but when I left for sunnier shores GBP/EUR was on the rise and sitting comfortably above the 1.15 mark. This morning when I return (surprisingly to rain!) rates are only marginally above 1.12. This was due to allayed fears from Greece and the European Debt Crisis, as brilliantly covered by Jonny in the last post.
But where do we think the GBP/EUR rate will head in the future and what are likely to be the key drivers? Well let’s put both of the currencies under the microscope and have a look at key issues that could really move the currency pair in either direction:
Debt Crisis – As has already been said the Eurozone have effectively bought themselves more time with this situation. Whether the newly enforced austerity measures will actually help Greek’s budget deficit is another question entirely but at least there is no immediate drastic threat, as you may have argued their was this time last week. If the austerity measures do not work in Greece, Portugal or Ireland and the bailouts are not enough to prevent the countries defaulting on their debt then you should expect Euro weakness.
Lagarde vs Agustens – This is a battle currently being fought, between hotly tipped favourite Lagarde (a French National) and Carstens Agustens (head of the Mexican Central Bank) for the title of Managing Director of the IMF. Agustens is looking fairly strong at the moment and if he does win the seat on the 30th of June then we may experience some doubt regarding potential bailouts as Agustens has already advocated the importance of strict, austerity measures – something that has already caused riots in some European states.
UK’s ‘self defeating’ austerity measures – The UK has been founded on sound economic principles and has been a generally well run financial state. However some academics have today mooted that the UK austerity measures are ‘self defeating’ as they restrict growth and therefore income via tax. Personally (and this is from a man with a family who have always been labour) I think the Coalition cuts are entirely necessary and although we are struggling out of recession, I think that when GDP growth picks up and interest rates look likely to rise then Sterling will really gain against the Euro.
Interest Rates – In the mean-time (before the UK interest rate increases) then the Euro will have the edge against Sterling, especially considering many speculators expect a second rate rise shortly. If you are also in this camp then it is not entirely off the cards that GBP/EUR rates dip below 1.10 in the short term.
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