Pound to Euro exchange rate: The Pound slumped to the lowest level in a week versus the Euro

Foreign Exchange Rates Currency News - The Pound declined against the U.S Dollar yesterdayThe Euro slipped below 1.32 against the U.S Dollar and retreated to lows in the region of 1.31 through the course of the week.

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound slumped to the lowest level in a week versus the Euro before the Bank of England’s Monetary Policy Committee decision on Thursday. The UK currency was relatively unchanged versus the Dollar, after reaching a low just above 1.57, as the central bank left interest rates and the bond-purchasing plan on hold.

There was little in the way of fresh economic data released in the UK and there will be caution surrounding the outlook in the Euro-zone. Sterling was hampered by a generally downbeat assessment of the banking sector, which reinforced the longer-term economic risks surrounding the outlook for growth.

The Bank of England governor Mervyn King is facing a mini revolt within the monetary policy committee, as a dispute escalates over whether inflation threatens the UK economy and whether more aggressive stimulus should have been sanctioned last month beyond the £50 billion that was approved. All nine policy makers have made public statements over the past two weeks and there are clear divisions forming.

Martin Weale indicated that he may not vote for any more asset purchases once the current round of quantitative easing finishes in May, while David Miles said there’s definitely a case for “aggressively” loosening policy even further. The conflict of opinion within the MPC may be unsettling for the Pound but we will have to wait for the minutes to be released later this month to gauge the voting pattern of last week’s announcement.

The debate surrounding monetary policy coincides with an uncertain outlook for the UK economy, as the recent increase in oil prices threatens to stoke inflationary pressures. The economy is also struggling to bounce back from the fourth quarter contraction, although recent PMI surveys indicate the economy will avoid another technical recession.

Although inflation eased to the lowest level in 14 months at 3.6% in January, it’s still well above the bank’s 2% target and oil prices have risen 18% in the past six months alone. The BoE has predicted inflation will slow to 1.9% by the end of the year and 1.8% by the end of 2013. MPC members were unanimous to increase QE last month, but were divided on the size of the increase.

The Pound rallied by the most in a week against the U.S Dollar on Thursday, but the UK currency slipped back towards 1.19 versus the Euro, after the Bank of England kept interest rates unchanged at 1% and held the asset purchase plan at £325 billion following the £50 billion increase in February. Both decisions were very much factored into the market but the Pound declined against the Euro, amid speculation that Greece will attract enough investor demand to make its debt swap plan a success.

The decision not to implement additional quantitative easing might be considered a positive for the Pound and that would explain the brief surge towards 1.58 versus the U.S Dollar. The Euro strengthened the most in two weeks versus the safe haven currencies, amid optimism that the region’s debt crisis will be contained. The Euro continued to rally after the European Central Bank left interest rates on hold and the President Mario Draghi said recent surveys show some signs of stabilization.

There is a sparse supply of UK economic indicators released this week, with the focus falling on the labour market data for February. The report is forecast to show the twelfth straight increase in the claimant count, as a weak economic recovery weighs on the labour market. The jobless rate is forecast to be unchanged at 8.4%, while other reports this week tend to focus on housing and trade data.

Euro / US Dollar

The Euro slipped below 1.32 against the U.S Dollar and retreated to lows in the region of 1.31 through the course of the week. Weak German industrial orders data undermined sentiment even further, while the German Finance Minister stated that he had talked openly with Greek officials about a Euro-zone exit for the struggling nation.

There was inevitably further uncertainty surrounding the Greek debt situation, as the PSI acceptance deadline drew closer. Despite expectations that an agreement to avoid a default would be reached, there were uncertainties surrounding the threat of collective action, which would likely trigger a credit event.

The Euro was unable to make any significant headway against the U.S Dollar on Friday with markets inevitably taking a cautious tone ahead of the monthly U.S employment report. There was only a limited reaction to the Greek PSI deal finally being completed. The non-farm payrolls data reported an increase of 227,000 for February and there was a significant upward revision to January’s data.

Data Released

EU – Eurogroup / Ecofin Finance Ministers’ Meetings (continued to Tuesday 13th)

U.S 18:00 – Fed Budget (February)

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