Tag Archives: sterling weakness
Where next for GBP/EUR?
The euro has continued to gain strength against Sterling despite the on-going concerns surrounding Spain and Greece. Currently the focus seems to have shifted onto the UK and as highlighted in my previous blogs this was always going to bring about a negative reaction in the markets, due to the problems our own economy continues to face. Quite frankly, it seems as if the UK is moving backwards, or at best stagnating. The warning signs have been there for months, as PMI data has been consistently poor and the Bank of England cut growth forecasts on what seemed like 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. Add to this continuing high unemployment and the widest trade deficit since records began and you can see why analysts are predicting the pound to come under increasing pressure over the coming months. However, despite all of these negative points mentioned above we are still only 2 cents away from the four year highs that we experienced only recently on GBP/EUR exchange rates and to me this still presents an excellent buying opportunity.
I feel it is paramount to understand where Europe may be heading next before we can really understand which direction GBP/EUR rates might take over the coming months. The answer to that question may be easier to answer after September, which could well prove to be a defining month for the EU. With the Spanish banking system in need of further bailouts, it is the handling of this situation and the repercussions of any further monetary assistance, that could prove pivotal to one of the EU’s largest economies dragging itself above water. We also have Greece coming under the spotlight once again and any decision on an extension to their debt programme or elimination from the EU, will have a significant impact on GBP/EUR exchange rates and could provide Sterling strength, if not handled with the up-most caution by EU leaders.
Personally i feel that anyone buying euro and waiting for 1.30 may be left dissapointed, unless their is a shift in public perception on the UK economy and/or further fallout in the EU. I feel the EUR will find resistance at 1.25, whilst any move through 1.28 will not come until we hear further reports from Spain and Greece.
EUR/USD moving away from all-time low
The EUR has continued to move away from the all-time lows it had experienced during its darkest hours. Concerns were rife that the USD would push below the 1.20 level, which was at least providing some kind of resistance. Thankfully for all those holding the single currency it has actually continued to rally away from this low and today pushed through the 1.26 barrier for the first time in months. The USD has not performed well across the board as fears grow that further rounds of Quantitative Easing are on the cards and with market unrest due to the upcoming presidential elections, I feel a move through 1.30 is feasible providing Spain and Greece don’t find themselves in further trouble over the coming weeks.
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As August comes to an end, it is safe to say that our summer has been fraught with excitement and anguish in equal measures. Whether it was Mo Farah storming to double Olympic victory, or our monthly dose of doom and gloom as Bank of England governor Mervyn King discussed the fragility of the UK economy, it has become apparent that no one quite knows what the remaining months of 2012 will hold for GBP/EUR and EUR/USD exchange rates.
What is clear to me is that September is sure to be a defining month for the EU, with Greece and Spain once again making the headlines. The outcome of these two scenarios is key for the long-term stability of the EU and in turn the short-term forecasting of the euro against its major counterparts. We have already seen the single currency move approx 3 cents away from its 4 year low against Sterling and almost 5 cents away from its all time low against the USD. In fact the euro does seem to be gaining some momentum and made further gains against both GBP and the USD during Tuesdays trading. The single currency has been severely hampered during most of 2012, predominently by the on-going EU crisis. Whilst these problems continue to persist, it is conceivable that the recent inroads made by the euro may be short-lived and for that reason it is important to stay in contact with your currency broker, to ensure you can be reactive to any market movements.
As I mentioned in my previous blogs I did feel it was more likely that GBP/EUR would move towards 1.25 than 1.30, even when Sterling reached its recent 4 year high. My gut feeling now is that we will see GBP/EUR rates rangebound between 1.25-1.27 whilst September’s economic events unfold and EUR/USD levels could continue to move away from the lows of 1.2099 we saw towards the end of July.
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US GDP figures were released today and made for uninspiring reading, causing the markets to shake as a result. The US economy grew by 1.9% in the first three months of 2012, down from the predicted 2.2%. The US economy is often seen as a barometer for global economic strength, therefore meaning investors will have a higher risk appetite if they feel US economic data is improving. Similarly, when US data is poor investors will shy away from the riskier currencies, such as ZAR, NZD and AUD and move their money back to the USD. This is because it is seen as a ‘safe haven’ currency, due to the fact it holds its value in times of global economic unrest.
The results of the US GDP figures seem to have caused some concern within the markets, as the Dollar has strengthened significantly against both GBP (1.5405) and the EUR (1.2359). The prediction is for growth to improve in the US for the remainder of 2012 at approximately 2.5%. This could give the global markets a boost, as investors will see the upturn in the US economy as a reason to be hopeful that this strength, will be mirrored in the global markets.
Personally I feel the USD will be range bound between 1.54-1.56 against GBP and 1.23-1.25 against the euro, as the markets wait for news in the build-up to the Greek elections before deciding which direction they will take next.
In Europe, the underlying issues that are weighing down the whole region do not seem to be lifting. Greece are under serious pressure to form a government, both willing and capable of instigating the ECB’s required austerity measures and Spanish bonds sales are creeping dangerously close to the 7% mark, causing major concern for EU leaders. Today European Central Bank (ECB) president Mario Draghi, informed eurozone figureheads that they must decide what they want the bloc to look like in the future, because the current set-up is ‘unsustainable’. He went on to say the ECB could not ‘fill the vacuum’ left by governments on creating growth or structural reforms. I think we will see GBP/EUR rates range bound between 1.2450-1.26 in the build-up to the Greek elections in June.
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Depending on your position I come with either great or bad news. The UK released their first prediction for GDP in the 4th quarter of 2010 with a surprising result. This is the first prediction as it collates information and expectations were for a small contraction compared to Q3 figures of 0.8% to 0.5%. The release actually showed a stark 0.5% contraction, negative growth, which surprised economists and resulted in a sharp movement on the currency market as investors moved away from sterling. This has resulted in over a 1% loss for the pound again most major currencies including both the dollar and the euro. So far on a £200,000 exchange you will achieve €3,200 less Euros and $5,750 less Dollars, a very large movement that may not have finished yet.
It shows once again that markets can surprise us and that no one knows where the markets will move. Being in a position to trade in a moment is key to limit potential losses or gains and when there is a good rate of exchange to secure it. A lot more is lost through indecision compared to no decision on the currency market.
The remainder of this week we still have large reports from both the euro and the dollar so I do expect the volatility to remain, however I don’t expect these losses for sterling to be regained.
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