The Euro has retreated today after the European Central Bank kept rates unchanged at 0.75% and slashed its growth forecasts for 2013. Projected Eurozone growth is now expected to range between -0.9% and +0.3% suggesting that it is more than likely that the Eurozone economy will contract next year.
In the UK, the Bank of England as expected kept interest rates at 0.50% and the Bank’s Quantitative Easing Asset Purchase Programme was also maintained at £375bn.
As a result the Pound is up against the Euro by nearly 1 cent and currently trades at 1.2395 (0.8068) and the Euro is down 1 cent against the US Dollar at 1.2980. The Pound trades relatively flat against the US Dollar currently at 1.6090 on the interbank market.
Matthew Porter 15:15 06/12/12
Deal. A deal has definitely been done, but was it a good one? Let alone good, was there even any point to it? These are the questions that market experts are starting to ask as doubts grow as to whether this deal will actually do anything to solve Greece’s long term national debt problem.
European finance ministers last night, as expected, agreed to release the next tranche of financial aid to Greece. The meagre sum of €43.7 billion Euros worth of loans starts to be paid to the debt ridden country from December. It is believed that this will help plug the gap in the country’s finances until the end of 2014, however for any true progress to be made many market analysts are calling for at least some of Greece’s outstanding debt to be written down. It is becoming ever more apparent that simply applying increasingly stringent austerity is not having the desired effect, in fact it could even be exacerbating the problem.
Closer to home, yesterday George Osborne announced who is set to succeed Sir Mervyn King as Governor of the Bank of England next year. The decision to name Mark Carney, currently the governor of the Canadian central bank, seems to have taken most people by surprise. However, whilst some of the decisions that Mr Osborne has made whilst Chancellor of the Exchequer have come under scrutiny, this one seems to have been well received and was even deserving of approval from his opposite number, shadow Chancellor Ed Balls. Mr Carney has been widely commended during his time at the Canadian central bank, where he has successfully navigated Canada through some of the toughest global economic conditions in living memory, with Canada fairing much better than many other countries during this time.
This morning Sterling improved to a morning high of 1.2384 against the Euro, whilst the Dollar has also risen against the Euro, with EUR/USD hitting 1.2935. The weakening Euro comes on the back of the agreement made last night between European finance meetings, as markets, whilst relieved a deal was made, are concerned that it will do little to stabilise Greece’s finances in the long term. We could see further movements this afternoon as figures for US Durable Goods Orders are released. Positive results could see the Dollar appreciate further and potentially compound the weakening Euro.
The Euro strengthened to a three week high against the Dollar and a month high against Sterling yesterday as optimism grows that a deal on Greece will be reached. Considering that a Greek default, bankruptcy and inescapable exit from the Euro would otherwise be inevitable, an agreement to extend financial aid to Greece seems to be guaranteed, as does a continuation of the Eurozone debt crisis merry-go-round.
After putting up substantial resistance to altering the current Greek target for a debt to GDP ratio of 120% by 2020, the International Monetary Fund has softened its stance and is said to be willing to lessen the target to 124%, a figure still considered viable. This will still leave a gap which is believed to be around 10 billion Euros, a hole that will need to be plugged and the mechanics of how this will be done are still to debated, but this is likely to be easily overcome.
Trading is relatively flat this morning following the release of German GDP and IFO Business Climate figures, as well as UK Mortgage Approvals. The data released so far has been positive across the board which has kept trading relatively flat, apart from a few minor spikes following the immediate release of the figures. The Pound is currently trading close to 1.2342 against the Euro and the rate is continuing to hover at this level where the Pound has found a reasonable amount of support. Should Sterling drop through this, the next level of stiff support for the pound is at 1.2248.
We could also see the Pound drop back off against the Dollar later today, potentially falling back to 1.5911 which is 38.2% retracement of 1.5267 and 1.6309, a level which was tested earlier in the week before the Pound eventually broke through. A break below 1.5911 would likely see support at 1.5882 being reached, with 50% retracement at 1.5788 being targeted after that should the decline continue.
With little more economic data due out for the rest of the week, attention is now likely to turn to the European finance ministers meeting on Monday. As this will be the last meeting before Greece is set to run out of money, it is now expected, and almost certain, that an agreement will be reached and the next tranche of financial aid granted to Greece. Therefore, we could see substantial price movements on Monday, with the Euro likely to be bullish should an agreement on Greece be reached without discord.
Christmas came early this morning for the UK as GDP figures confirmed, somewhat emphatically, that the UK has officially come out of recession. David Cameron declared yesterday during a lively Prime Minister Questions, at the end of a passionate statement regarding the strengthening UK economy to opposition leader Ed Milliband, that ‘the good news will keep coming’. Despite this statement, even the Prime Minister himself must have been pleasantly surprised this morning when the data was officially released, confirming a UK GDP Q3 increase of 1%, beating market expectations of 0.6%. This positive sentiment was conveyed in the markets as GBP/EUR jumped 35 pips in the ten minutes following the release. A large part of this increase is likely to be due to the effect the Olympics had on the economy as Olympic Games ticket sales helped revive growth. These results, whilst positive, should be considered with cautious optimism. Bank of England Governor Mervyn King commented yesterday that whilst the UK economy continues to recover, it is proceeding to do so at a ‘slow and uncertain’ pace. All of this means that the Bank of England’s Monetary Policy Committee will have a lot to think about when they meet on the 8th November to decide the UK’s monetary policy.
The economic data this morning from the UK contrasts drastically to the consistently negative information that was released yesterday morning in Europe. Between eight and nine AM yesterday nearly ten pieces of individual European economic data was released with each one being negative and failing to meet market expectations. This quite clearly hit the Euro as we saw nearly one cent fall off both EUR/GBP and EUR/USD following the data release. European leaders offered little help for the Euro either, as has come to be expected, following European Central Bank President Mario Draghi’s meeting with German lawmakers. Truth be told little was expected to come from this meeting which was more of a wooing campaign for Mr Draghi who is keen to gain the support of the German public to ensure the countries commitment to the ECB’s bond buying program which is hoped will help sure up the Eurozone.
The Euro has appreciated today following the European Central Bank’s decision to hold rates at 0.75%, pushing the Euro through the psychological level of 1.30 against the US Dollar and consolidating above 0.80p, currently at 0.8045, against the Pound.
Elsewhere, as expected the Bank of England voted to keep interest rates on hold at 0.50% and to continue with its programme of asset purchases known as Quantitative Easing (QE) at current levels totalling £375bn. Following the move in EUR/USD the Pound has ended the day up against the US Dollar at 1.6170 but down against the Euro at 1.2428.
Regarding the future direction of Bank of England rates and QE, and therefore the Pound’s value, focus will now turn to UK inflation data due to be released on 16th October and the minutes of today’s Bank of England meeting due to be published at 09:30 on Wednesday 17th October.
Yesterday Wednesday 15th saw Greece’s troubles resurface. With Greece facing a deepening recession, the Greek Prime Minister is set to meet with his French, German and Luxemburg counterparts next week to persuade Eurozone leaders to extend the period of austerity from two to four years, essentially planning to reduce the Greek budget deficit by 1.5% of GDP annually compared to the previous agreement of 2.5%. Due to the slower pace of deficit reduction it is believed an additional £20bn of funding would be required to support Greece.
In the UK, yesterday’s jobs figures continued to defy the recession with unemployment down to 8% and the claimant count dropping by 5,900 in July. Minutes released by the Bank of England also confirmed that the Monetary Policy Committee was unanimous in its decision to leave the bank rate unchanged at 0.5% and to maintain its Quantitative Easing Asset Purchase Programme at its current level of £375bn. Unlike in previous meetings, the bank did not hint towards a bias of further rate cuts giving Sterling a further boost. It is expected that the Bank will gauge the impact of the new Funding for Lending Scheme and the completion of its current £50bn extension of QE in November before it makes a decision on more monetary easing. Today, UK retail sales also beat market expectations growing by 2.8% year on year.
The better than expected news from the UK, coupled with the Eurozone’s on-going troubles has pushed GBPEUR higher towards 1.28, currently trading at 1.2793 (EURGBP 0.7817).
Elsewhere the Pound trades between 1.56-1.57 against the US Dollar and the Euro trades at 1.23-1.24 against the US Dollar on the interbank market.
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The Pound has fallen back below 1.28 against the Euro and back below 1.55 against the US Dollar following this morning’s preliminary UK GDP data release. The data showed that the UK economy contracted much more than many economists expected.
In the second quarter UK economic output plummeted, contracting -0.7% quarter on quarter and contracting -0.8% year on year compared to a median forecast of -0.2% QoQ and -0.3% YoY. Whilst factors including the poor weather and the Jubilee bank holidays may have exaggerated the fall in GDP, underlying economic growth is expected to be close to flat or declining over 2012 despite a predicted improvement in the third quarter.
With UK inflation falling back towards the target of 2% (currently at 2.4%) and the economy in contraction, the likelihood of further Quantitative Easing and an even greater prolonged period of low Bank of England interest rates (currently 0.5%)has increased.
Please do not hesitate to contact the dealing team on +44 (0) 1695 581 669 for a live quote or tailored solutions to your currency requirements.
The Euro has continued to come under strong selling pressure as the European Central Bank has indicated that it will not accept Greek government bonds as collateral. EURUSD has fallen from the morning high of 1.2282 to a low of 1.2144. 1.2144 representing the lowest EURUSD exchange rate since June 2010 when the rate hit a low of 1.1876.
The Pound has made strong gains against the weakening Euro hitting a high earlier of 1.2866, the highest level since October 2008. Against the US Dollar the Pound tracked the sharp falls in EURUSD with GBP falling from 1.5724 to a low of 1.5626.
As expected the Bank of England has increased its programme of Quantitative Easing by an additional £50bn taking the total asset purchase scheme to £375bn. The Bank also decided to hold the bank rate at 0.50%.
In Europe, the European Central Bank cut its key interest rate by 0.25% to 0.75% a record low.
On the interbank market the Pound has climbed back above 1.25 against the Euro, currently at 1.2525. Whilst the Euro has fallen back below 1.25 against the US Dollar and currently trades at 1.2440. The Pound continues to trade between 1.55 and 1.56 against the US Dollar.
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Minutes released today by the Bank of England have revealed that the Bank came close to extending its programme of Quantitative Easing (QE) as four of the nine member Monetary Policy Committee voted to extend QE. Three members including Bank of England governor Mervyn King voted to extend QE by an additional £50bn whilst one member voted for a smaller addition of £25bn. The Bank also considered the merits of cutting the Bank Rate from 0.50% but concluded that a rate cut had no advantages over more QE.
As previously discussed, further QE from the Bank of England continues to pose a risk to Sterling’s value. On release of the minutes at 09:30 the Pound fell back below 1.24 against the Euro hitting a low of 1.2350 and back below 1.57 against the US Dollar hitting a low of 1.5650 before recovering back to 1.5730 against the US Dollar and 1.2385 against the Euro.