Sterling fell to its lowest since late December against the euro this morning, weighed down by fears of economic weakness that may prompt further monetary easing from the Bank of England. Data showed British public borrowing was lower than expected in December, thanks to stronger tax receipts, but total outstanding debt rose above the 1 trillion pound mark for the first time on record. The euro was also supported by better-than-expected euro zone data and hopes of an eventual deal to restructure Greek debt, which prompted investors to trim some of the hefty short positions that have built up in the single currency.
Analysts said upcoming British data and events could add to concerns about the prospect of more quantitative easing as austerity measures and the impact of the euro zone debt crisis hurt the economy. UK GDP data on tomorrow is expected to show the Britain’s economy contracted by 0.1 percent in the fourth quarter, which would add to fears that the economy is sliding back into recession.
Surveys showing a surprise upturn in the euro zone services sector helped lift the euro, raising hopes the region may yet escape recession. However, most analysts believe the scope for further euro gains will be limited due to concerns about the risks of the euro zone debt crisis deepening. One trader was quoted as saying ”We’ve had a wave of optimism towards the euro over the last couple of days and expectations that we’ll get this Greek deal before the end of the week,” but going on to add “We could see further gains over the short-term, but I think it remains vulnerable.”
The worry is that there were likely to be negatives ahead for sterling, with the market positioning for more QE from the Bank of England in February and a potentially weak GDP number on Wednesday. Analysts were also wary that a speech by BoE Governor Mervyn King later today and the release of minutes from the most recent BoE policy meeting tomorrow may add to the expectations for an increase in asset purchases next month. BoE policymaker Adam Posen said on Monday Britain’s economic outlook had improved slightly but more quantitative easing would probably still be needed.
The pound/euro exchange rates have been fairly buoyant of late with some good opportunities for euro buyers to lock into rates we havent seen for a year but with the continued fragility of the UK economy and continued efforts to resolve the Greek debt problem we may not see these levels continue over the coming months. Speak to specialists Currency Index to discuss the options available to whether you need Euros now or in a few months time, there is a solution to help.
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Today Eurozone finance ministers are meeting to decide what terms of a Greek debt restructuring they are willing to accept, as crunch time for the Greek bailout plan is looming. Ahead of next week’s EU summit, where the Eurozone’s stability pact is also due to be signed off, a deal must be agreed between EU leaders and Greece’s creditors, for a write-down of the value of their debt. An improved European stability mechanism is also due to be signed off next week.
Assuming the talks result in new treaties next week, we could be in for some Euro strength, giving those of you looking to buy Euros a window of opportunity this week to secure your rates at preferential levels. While there is no easy way of predicting the markets (and anything can happen in the current environment of uncertainty), it is worth noting that recent history shows how vulnerable sterling is to rates falling back:
- November 2008 (1.21) 1 month later fell 15.7% to 1.02
- June 2010 (1.2251) 1 month later fell 4.3% to 1.1721
- August 2010 (1.2250) 3 months later fell 8.7% to 1.1184
- Jan 2011 (1.2069) 4 months later fell 8.3% to 1.1057
This week we also have the Bank of England minutes on Wednesday morning, which will show whether any further quantitative easing was discussed this month. Markets would not be surprised to see further economic stimulus in February, given that inflation is now falling back, and this would be likely to lead to sterling weakness, so any clues from this month’s minutes could have an effect on exchange rates. Keep up to date with pound/euro exchange rates by speaking with one of the traders at Currency Index on 0800 043 2623