Pound to Euro Exchange Rate Forecast – The Pound is continuing to trade close to three-and-a-half year highs against the Euro

By on May 14th, 2012.
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Pound to Euro Exchange Rate Forecast - The Pound is continuing to trade close to three-and-a-half year highs against the EuroOver the coming week the Pound should continue to hold its excellent position against the Euro as political events unfold in Greece.

Foreign Currency Market Update – GBP / EUR Update

The Pound is continuing to trade close to three-and-a-half year highs against the Euro as the prospect of a Greek exit from the Eurozone becomes increasingly realistic. Sterling reached 1.2500 against the Euro last week following the Bank of England’s decision to leave quantitative easing on hold.

Political developments in Greece over the past week gave rise to a grim realisation within financial markets and the consensus is that a Greek exit from the Eurozone is now a question of when, rather than if. Although the large majority of Greek voters want to remain inside the currency bloc, they do not wish to adhere to the crippling austerity measures that accompany the €130 billion EU/IMF bailout package.

With leaders unable to form a coalition government, a new election looms large in which Alexis Tsipras of the radical leftist SYRIZA party is the strong favourite to win. If elected, Tsipras has vowed to renege on Greece’s austerity agreement which has left the country’s position inside the Eurozone under serious threat. The severity of the situation is reflected in the language of European Central Bank policymaker Luc Coene: “I guess an amicable divorce – if that was ever needed – would be possible.” It is almost unheard of for senior ECB representatives to speak of a member exiting the Euro.

The news has caused European stock markets to plummet and the Euro has remained very weak in the currency exchange market. The single currency was not helped by a dismal set of European Commission forecast reports in which growth prospects for the majority of Eurozone governments were revised downwards. Sterling managed to sustain its exceptional recent gains as the Bank of England decided against any further boosts to its quantitative easing programme. The decision suggests a move towards a more relaxed stance from the Central Bank, although further stimulus is still a possibility as the UK economy remains subject to downside risks.

Over the coming week the Pound should continue to hold its excellent position against the Euro as political events unfold in Greece. Eurozone first quarter GDP results are expected to show that the currency bloc contracted further in the first three months of 2012 and the Euro is also likely to come under pressure from a drop in Consumer Price Index inflation. The only major concern for the Pound comes from the Bank of England’s quarterly Inflation report. If the statement shows that policy members are considering further stimulus as a matter of priority then Sterling’s positive momentum could be halted, but if the report follows analysts’ expectations by detailing a more relaxed approach from the Central Bank then the Pound to Euro exchange rate could possibly rise up even higher.

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Summary of major upcoming data releases that we think may move the market.

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