Sterling/Euro Currency Review November 2013
Thursday 05 December 2013
Sterling reversed loses against the euro incurred in October as economic data continued to improve, says Ben Scott.
Sterling was buoyed by improving economic data which lead to an increase in growth predictions for 2014, with the influential OECD (Organisation for Economic Co-Operation and Development) raising UK economic growth forecasts for 2014 to 2.4% from previous 1.5%, adding to Sterling strength.
Yet it was undoubtedly the actions of the European Central Bank (ECB) during this period, and expectation surrounding future policy which had such a dramatic and detrimental effect on the euro.
An initial GBP/EUR low of €1.1727 (Interbank throughout) as illustrated by point A on the graph, was followed by a period of gradual increase resulting in a high of €1.2051 on 29 November 2013, the highest level since January 2013, trading at an average rate of €1.1921 throughout November.
Manufacturing and construction figures improved above forecast, whilst crucial service sector figures beat expectations adding to the growing belief that the UK economy is enjoying a broad-based economic recovery with respected financial firm Grant Thornton claiming that the "UK is to be the fastest-growing Western economy".
Meanwhile concerns grew surrounding the sustainability of recent economic improvements throughout Europe. The decision of credit rating agency Standard and Poors to cut France's credit rating, almost two years after stripping France of its prestigious AAA rating, provides another example of the challenging economic conditions which look set to stifle any sustainable recovery in the short-term, to the detriment of the euro.
It was the announcement in early November of a largely unexpected interest rate cut from the ECB from 0.5% to 0.25% which caused significant euro weakness and surely puts the ECB on a collision course with the European powerhouse Germany. Given increasing inflationary pressures in Germany, it is not inconceivable to suggest Germany would potentially be looking to raise interest rates in 2014 if they were in sole charge of their own monetary policy. This provides another example of monetary policy failing to suit all European countries, which will surely lead to division within Europe and potentially further euro weakness.
A significant drop in the rate of unemployment supported Sterling’s positive start to the month, although failure to break through the important psychological rate of 1.20 was the catalyst for the reversal against the euro immediately after Point B.
A decrease to UK inflation was seen to reduce the potential of an interest rate hike ahead of the current Bank of England (BOE) forecast of 2016, whilst comments from BOE Monetary Policy Committee member Martin Weale that it was “perfectly possible that the right thing to do is keep interest rates at 0.5% even after unemployment falls below 7%”, again highlights the Bank of England’s commitment to reduce growing speculation of interest rate increases leading to further Sterling weakness.
Positive Sterling gains were quickly re-established from Point C, resulting in the first sustained break of 1.20 since January 2013. Sterling gains were underpinned by the release of the Confederation of British Industry (CBI) industrial trends survey, which recorded the biggest consensus of optimism for over two decades.
Growing speculation that the ECB is considering a cut to its deposit rate, into negative territory for the first time ever, provided the impetus for Sterling’s break of 1.20 as the appeal of investing in the euro plunged.
Yet it was undoubtedly the actions of the European Central Bank (ECB) during this period, and expectation surrounding future policy which had such a dramatic and detrimental effect on the euro.
An initial GBP/EUR low of €1.1727 (Interbank throughout) as illustrated by point A on the graph, was followed by a period of gradual increase resulting in a high of €1.2051 on 29 November 2013, the highest level since January 2013, trading at an average rate of €1.1921 throughout November.
Manufacturing and construction figures improved above forecast, whilst crucial service sector figures beat expectations adding to the growing belief that the UK economy is enjoying a broad-based economic recovery with respected financial firm Grant Thornton claiming that the "UK is to be the fastest-growing Western economy".
Meanwhile concerns grew surrounding the sustainability of recent economic improvements throughout Europe. The decision of credit rating agency Standard and Poors to cut France's credit rating, almost two years after stripping France of its prestigious AAA rating, provides another example of the challenging economic conditions which look set to stifle any sustainable recovery in the short-term, to the detriment of the euro.
It was the announcement in early November of a largely unexpected interest rate cut from the ECB from 0.5% to 0.25% which caused significant euro weakness and surely puts the ECB on a collision course with the European powerhouse Germany. Given increasing inflationary pressures in Germany, it is not inconceivable to suggest Germany would potentially be looking to raise interest rates in 2014 if they were in sole charge of their own monetary policy. This provides another example of monetary policy failing to suit all European countries, which will surely lead to division within Europe and potentially further euro weakness.
A significant drop in the rate of unemployment supported Sterling’s positive start to the month, although failure to break through the important psychological rate of 1.20 was the catalyst for the reversal against the euro immediately after Point B.
A decrease to UK inflation was seen to reduce the potential of an interest rate hike ahead of the current Bank of England (BOE) forecast of 2016, whilst comments from BOE Monetary Policy Committee member Martin Weale that it was “perfectly possible that the right thing to do is keep interest rates at 0.5% even after unemployment falls below 7%”, again highlights the Bank of England’s commitment to reduce growing speculation of interest rate increases leading to further Sterling weakness.
Positive Sterling gains were quickly re-established from Point C, resulting in the first sustained break of 1.20 since January 2013. Sterling gains were underpinned by the release of the Confederation of British Industry (CBI) industrial trends survey, which recorded the biggest consensus of optimism for over two decades.
Growing speculation that the ECB is considering a cut to its deposit rate, into negative territory for the first time ever, provided the impetus for Sterling’s break of 1.20 as the appeal of investing in the euro plunged.
Outlook
Numerous factors will determine the short-term direction of GBP/EUR rates.
Whilst the UK’s short-term economic outlook continues to improve, comments from the Bank of England’s Paul Fisher that the UK’s economy is “a long way from normality”, emphasised concerns that still linger regarding the sustainability of the UK recovery, meaning any drop-off in recent improvements would potentially prove extremely damaging for Sterling.
Bank of England Governor, Mark Carney, has been keen to reduce market expectations, but comments proclaiming that the “UK glass is defiantly half full”, when speaking of the UK economic outlook, clearly shows a shift in sentiment, and with the expectations of interest rate hikes constantly growing, Sterling could benefit further going into 2014.
Nevertheless, further Sterling strength would reduce competitiveness of 'UK PLC', and given the stubbornly high trade deficit in the UK, efforts to devalue Sterling may be necessary to help cement the economic recovery.
Whilst the UK’s short-term economic outlook continues to improve, comments from the Bank of England’s Paul Fisher that the UK’s economy is “a long way from normality”, emphasised concerns that still linger regarding the sustainability of the UK recovery, meaning any drop-off in recent improvements would potentially prove extremely damaging for Sterling.
Bank of England Governor, Mark Carney, has been keen to reduce market expectations, but comments proclaiming that the “UK glass is defiantly half full”, when speaking of the UK economic outlook, clearly shows a shift in sentiment, and with the expectations of interest rate hikes constantly growing, Sterling could benefit further going into 2014.
Nevertheless, further Sterling strength would reduce competitiveness of 'UK PLC', and given the stubbornly high trade deficit in the UK, efforts to devalue Sterling may be necessary to help cement the economic recovery.
Ben Scott
Foreign Exchange Ltd
www.fcexchange.co.uk
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