The threat of further quantitative easing is looming large over the British Pound.
Foreign Currency Market Update – GBP / EUR Update
Weak Eurozone Manufacturing PMI’s, rising Spanish bond yields, and the lowest level of business confidence in Germany have combined to keep the Euro down against Sterling despite the threat of further quantitative easing looming large over the British Pound.
The Euro pushed the Pound to its lowest level on Wednesday morning as the Bank of England minutes report detailed a pronounced shift in sentiment amongst monetary policy committee members towards further monetary stimulus. The minutes report showed that members narrowly voted 5-4 against expanding the asset purchasing target in June, marking a turnaround for 3 policymakers including Central Bank governor Mervyn King. Markets took the news as a signal that further quantitative easing is imminent in the near future; this view was supported by May’s UK inflation figure which came in worse-than-expected at 2.8%, and appears to give the BoE more room to work with. Subsequently GBP/EUR dipped as low as 1.2357 as investors sought to price-in the possibility of increased stimulus.
The beginning of the week was interspersed with negative Eurozone news of a mild variety: German ZEW data declined at the fastest pace this side of 1998; German Producer Prices fell more-than-anticipated to 2.1%; and Italian Industrial Orders failed to improve to anywhere near a positive level. However the melting pot of Eurozone hazards heated up on Thursday with Eurozone Manufacturing PMI declining for a fifth straight month and weak German Manufacturing PMI highlighting that even the economic powerhouse at the helm of the European project is suffering from the burns of the Eurozone debt crisis. The hypothetical current account of the 17-nation bloc also took a hit with around €7 billion withdrawn without repayment. Added to this the fact that yields on Spanish 10-year bonds were/are approaching the dangerously unsustainable level of 7.0% and it is easy to see how Sterling has managed to maintain its strong rate around 1.2455 against the Euro.
Looking ahead at the coming week it will be interesting to see whether new Greek Prime Minister Antonis Samaras is able to recover from a detached retina in time to attend a key EU summit on Thursday and Friday. With the view upheld in Europe that Greece has wasted enough time already in taking two general elections to form a government, investors will not be impressed if their new leader is unable to attend now that he has been sworn in. German inflation is set to fall slightly, and so is the nationwide House Price Index in the UK. Both the Eurozone and UK consumer confidence surveys are expected to hold steady at a depressing -19.6 and -29 respectively.
Apart from the impressive performances of Italy, Spain, Portugal and Germany at Euro 2012 it is hard to see any progress in the Eurozone this week, and this could be reflected by modest improvements in the Pound to Euro exchange rate.
Summary of major upcoming data releases that we think may move the market.
- The Pound to Euro exchange rate reached a three and a half year high on Monday of 1.2443 as general elections in France and Greece left financial markets reeling.
- The Pound to Euro Exchange Rate has been fluctuating around the 1.200 mark this week
- Rand Update – The spectre of further quantitative easing is still hanging over the pound
- Foreign Currency Rate Forecast News – The Pound declined against the Euro exchange rate for the sixth consecutive day
- Pound Sterling, the Euro and US Dollar exchange rate forecast – The Pound actually rallied against the Euro for the first time in six trading days