Sterling sell off abated as Pound Strengthens against Euro

Sterling Sell off abated as Pound Strengthens against Euro

Sterling vs. Euro;

This week’s report will focus on the erratic swings in GBP/EUR rates, the news and data that caused the fluctuations, and potential moves in the coming weeks.  The story dominating FX headlines recently has been sterling’s rapid decline.  The pound has been subject to an aggressive sell-off as fears mounted that the UK may enter a triple-dip recession, which could result in the loss of our Triple-A credit rating; and the now looming prospect of an in/out referendum on Europe for 2015, has created greater uncertainty.  Last week, however, we saw the first significant retracement of this pressure and, once again, ECB President Mario Draghi was at the centre of the move.

The single currency began last week on the back foot as news broke of corruption and scandal in the Southern European States.  Spain and Italy were both back in the headlines with surprising allegations of undeclared payments from a secret slush fund being received by Spain’s ruling conservative party. 

This news was coupled with the announcement that Banca Monte dei Paschi di Siena, the World’s oldest surviving bank, was involved in a derivatives scandal . 

So why has this affected euro rates?  Essentially this calls on the old cliché “Markets hate uncertainty”. 

Though this caused a rise in GBP/EUR rates the largest swing in prices can be credited to the words of Mark Carney and Mario Draghi.  The incoming Governor of the Bank of England sat before the Treasury select committee on Thursday, and in his testimony to MP’s, he outlined his thoughts and intentions for the UK economy moving forward.  Mervyn King has suggested before that Quantitative easing has a diminishing rate of return, with regard to effectiveness, though Carney outlined that the BoE could expand the range of assets it purchases, whilst supporting the pound from further weakening, all without effecting the UK’s inflation target.  Sterling began strengthening both before and during Mr Carney’s words.

Mario Draghi once again serenaded the currency markets with his announcement last Thursday; speaking on the euros current bull-run.  He discussed the significance of the rate, with regard to growth and price stability, highlighting the dangers of a continual strengthening.  His comments on inflation hinted that a cut to interest rates may not be entirely off the table; the last time such a measure was taken, we saw GBP/EUR rates surge to four year highs.  His words came as a surprise to many, most expected him to touch upon the euros recent appreciation, though the announcement appeared more of a concerted effort to talk the single currency down.

Much of the recent coverage of GBP/EUR rates appears to show the UK, seemingly, in perpetual decline and the euro storming the markets.  Yet the most recent NIESR GDP estimate for the UK came in at 0.0%; better than expected, however, sterling/euro is at a pivotal point.  The UK certainly is not out of the woods, despite the recent flurry of positive data, the last official GDP figures have been below forecast.  If this were to happen again the false hope could be doubly damaging for the pound.  Not only this, but the euros recent appreciation has largely been built on rhetoric rather than any concrete data.  Although Greece’s Finance Minister has suggested that they could begin the road to recovery by the end of the year, this remains to be seen, and if there was a cut to interest rates to stimulate the European economies, or more negative press, we could see the euro weaken again. 

Sterling vs. US Dollar;

It was another choppy week for cable and the swings we saw in exchange rates last week could well continue. Since the start 2013 sterling has been in free fall against the US Dollar, and the current trend shows no signs of improvement.

Positive UK retail sales data released on Tuesday did see a brief spike in rates; figures showed that sales increased for January by 1.9% compared to January 2012 which is the largest year on year rise since December 2011. The news saw the GBP/USD cross jump to a high of $1.5792 but sterling could not hold its value over the course of the day and rates quickly started to fall. By midweek the pound actually fell by 1% against the dollar to reach a low of $1.5634.

Over in the states talk of spending cuts and tax increases have resurfaced. The temporary fiscal cliff avoidance package put together by President Obama on New Year’s day is due to expire on the 1st March, leading the President  to approach congress to put another short term package together to avoid larger cuts next month. The proposal was quickly rejected and the longer it drags on the more likely we are to see the dollar come under pressure. Indeed last week’s poor US Q4 GDP figure was largely put down to fiscal cliff  pressures and if a permanent solution cannot be put in place, there is chance rates could start to push higher.

Thursday was a potentially positive day for the UK last week with the Bank of England holding their monthly meeting. However the expected hold on interest rates and no further QE only gave the pound a brief boost. Even when combined with the zero growth (but no decline) estimate of Januarys’ GDP the pound could not buck the general trend of decline against the Dollar. The UK economy seems to be the centre of attention and in the absence of growth the pound simply cannot keep pace with the Dollar at the moment.

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