Currency Forecast - Sterling Vs. Euro 1st December 2008

 Sterling rallied for a second consecutive week against the Euro, making encouraging gains toward the major technical barrier at 1.2200.  Having dropped as low as 1.1550 during November the recent gains could signal a revival in sentiment toward the pound, which had been the subject of consistent selling pressure since the latest leg of the credit crisis developed in September/October.  Continued recovery in stock markets has been helping those currencies that suffered most during October's turmoil, so a continuation of this trend could see some good buying opportunities over the next few days for clients with Euro requirements.

  Both the Bank of England and the European Central Bank meet this Thursday, with both expected to slash interest rates as economic indicators continue to deteriorate and inflation moderates.  The only uncertainly is the scale of any cuts, with most analysts focusing expectations on a 0.5% cut from each, which would leave Euro rates just above UK rates at 2.75% and 2.5% respectively.

Currency Forecast - Sterling Vs. Euro 17th November 2008

  Sterling has declined to new all time lows against the Euro over the last week after gloomy comments from Bank of England officials, and an increasing expectation that interest rates will be cut again in the coming months.  Markets initially reacted positively to the surprise 1.5% cut, interpreting the move as decisive, and also likely to keep further cuts on the back burner.  However, mounting speculation of further easing weighed heavily on the pound last week, sending it well below to 1.20 level for the first time ever. 

  In the last 24 hours we've seen a bounce after trading as low as 1.1550 late last week.  Euro buyers may want to take advantage of the bounce to cover any near term requirement.  Meanwhile, any clients looking to sell Euros over the next few months should strongly consider trading at current levels, or using the currency weakness as an opportunity to establish a "stoploss order" which protects against a continued bounce in the exchange rate.

Currency Forecast - Sterling Vs. Euro 4th November 2008

  In last week's update we maintained a negative view of Sterling, not least because the market was probing new all time lows.  Since then we traded sharply higher toward the top of the six month range, and all the way back again, and currently look likely to test the 1.2200 level again over the next 24/48 hours. 

Traders are pricing in at least a 50 basis point interest rate cut in the UK on Thursday, and possibly more.  Meanwhile the European Central Bank are also expected to cut rates by 0.5%.  If both banks cut by half a percent the interest rate differential will remain constant at 0.75% (UK 4.5%, ECB 3.75%), but some analysts are calling for a deeper rate cut in the UK. 

The ECB on the other hand has shown itself to be more reluctant to ease rates over the last year, leading many to speculate the UK rates could match European levels by early next year.  That is weighing heavily on the Sterling/Euro exchange rate.  With both banks announcing on Thursday around noon, brace for volatility!

Currency Forecast - Sterling Vs. Euro 15th October 2008

  The unprecedented events of the last two weeks have caused some major moves in the currency markets, sending sterling sharply lower last week after the UK government announced legal action against Iceland to recover deposits that were under threat as the result of Iceland's banking collapse.  Sterling started to bounce back after the announcement of a £37bn rescue package to bolster floundering banks including RBS, HBOS and Lloyds. 

The UK government has set the precedent by part nationalising the banks, and sterling rallied as investors applauded the decisive action.  As stock markets bounced smartly from their lows this week, the pound continues to rally, and we are now trading back towards the upper end of the six month trading range.  The extreme volatility in sterling/euro has ultimately left the exchange rate relatively unchanged, which fairly reflects the fact that investors have struggled to distinguish the UK banking situation from that in Europe.  The coordinated interest rate cut by six central banks last week leaves the sterling/euro interest rate differential unchanged at 0.75% (UK - 4.5%, Europe - 3.75%).

Currency Forecast - Sterling Vs. Euro 1st October 2008

  Both Sterling and the Euro were under pressure at the start of the week as more banking failures hit the news wires.  News that Bradford and Bingley was to be nationalized emerged as Dutch bank Fortis tapped the governments of Belgium, Holland and Luxembourg for over €11bn in rescue funding.  Further bad news weighed on the Euro yesterday after lender Dexia SA needed €6.4bn of emergency funding.  A decline in a key measure of European consumer prices compounded the Euro fell weakness as traders raised bets on the ECB cutting interest rates, allowing sterling to gain some positive momentum against the single currency.  This saw the GBP/EUR rate trade sharply higher, but some of these gains were eroded over the course of the day.

  The technical outlook is still unclear while we continue to trade in a broadly sideways range between 1.2350 and 1.2825.  Clients should remain extremely cautious given the currency financial market turmoil. 

Currency Forecast - Sterling Vs. Euro 23rd September 2008

  Sterling made a new all time low against the Euro in early September, and the outlook was very gloomy, with many analysts calling for interest rate cuts by the year end to help ease the sagging housing market.  However, the Euro was hit hard after both central banks held interest rates steady at the September meeting, with the ECB president Jean Claude Trichet warned of "weak activity" in the euro zone, prompting traders to start speculating that the hawkish central bank may start moderating its stance over the next few months.  Falling oil and commodity prices were also helping to weaken the Euro as markets saw fresh hopes of moderating inflation next year, which could allow more scope for the ECB to cut rates.

  Despite the recent financial crisis impacting UK banks, sterling has managed to hold onto most of the recent gains, reflecting in part a diminished appetite for the Euro, but also some exhaustion from sellers of the pound.  Having rejected the new all time lows in early September, we've seen solid progress since, and downside only emerging in the last two sessions following the release of another gloomy house price report on Friday.  We also saw a surprisingly strong retail sales figure, which did help sterling to make a new high, albeit briefly.

   

Currency Forecast - Sterling Vs. Euro 5th Septmeber 2008

  In our last update we urged extreme caution as the market was testing the bottom of the six month trading range.  In fact, we broke through the previous all time lows at 1.2350 set in April.  The market traded sharply lower as a result, until yesterday's central bank meetings which helped sterling recover some losses and recapture the 1.2350 level today.

  Both the Bank of England and the European Central Banks kept interest rates on hold at 5% and 4.25% respectively.  This was as expected, but the Euro came under pressure after ECB governor Jean Claude Trichet emphasised the risks to growth, prompting some market participants to speculate that a possible rate cut is in the pipeline. 

   

Currency Forecast - Sterling Vs. Euro 27th August 2008

  We urged caution in our last update, simply because the pound is still trading close to all time lows against the Euro.  With more gloomy comments from Bank of England officials, and another month of weak mortgage approvals data, sterling has declined sharply again today, and we are now testing an important technical support level around 1.2465.  If the market breaks below here, the only support left is the all time low of 1.2350 set in April.  So, we are hoping for a strong reaction from current levels to let us know that there are still buyers of the pound out there(!), but clients with Euro requirements should remain extremely cautious in case the market is about to break out of the 1.2450 - 1.2765 range that has dominated trade for the last few months.

   

Currency Forecast - Sterling Vs. Euro 15th August 2008

  We've seen a highly volatile week for the Sterling/Euro exchange rate.  On Wednesday the Bank of England issued a gloomy outlook for the economy, with growth coming to a virtual stand still and unemployment claims rising at the fastest rate since 1992 in July.  Bank of England governor Mervyn King held out the possibility of negative growth in 2009, prompting traders to sell the pound in expectation of interest rate cuts.  Despite inflation remaining at elevated levels the bank appeared to play down fears over price stability, leaving room for a possible rate cut later in the year. 

  After plunging on Wednesday the pound has regained some ground against the Euro after it emerged that the Euro zone economy contracted by 0.2% in the second quarter.  Some economists are now calling for a cut in interest rates in early 2009.  Part of the reason for the Euro's unprecedented strength over the last year has been the staunchly hawkish stance of the European Central Bank, who refused to cut interest rates in the wake of the credit crunch, instead focusing on their mandate which is "to maintain price stability in the medium term".  We are now seeing the first hints that this stance may have to soften as certain EU economies move toward recession.

   

Currency Forecast - Sterling Vs. Euro 8th August 2008

  The Euro is weaker today after both the Bank of England and the European Central Bank kept interest rates on hold at yesterday's meetings.  The ECB noted the downside risks to economic growth as well as the inflationary pressures mentioned in previous statements, so traders are taking this as the first sign that their bias might shift toward possible rate cuts later in the year or early 2009, having been firmly on the hawkish side of the growth/inflation debate over the last year. 

   

Currency Forecast - Sterling Vs. Euro 31st July 2008

  Following last week's Bank of England minutes sterling rallied up toward the upper end of the recent range which is marked by resistance at 1.2765.  We were hoping for a breakout above this level but the positive momentum waned after poor retail sales data last Thursday, dragging the pound back to lower levels this week.  Despite weakening sentiment toward the UK economic outlook, sterling has managed to hold its own against the broadly weaker Euro this week.

   

Currency Forecast - Sterling Vs. Euro 23rd July 2008

  Sterling is rising sharply today after the release of the minutes from the July Bank of England meeting this morning.  The nine member Monetary Policy Committee were sharply divided over the next move in interest rates, with seven members voting for no change and one for a rate cut; but the real surprise was that one member voted for a rise in interest rates . 

  This news sent the pound sharply higher against most major currencies, and leaves the Sterling/Euro rate testing ten week highs.  There is technical resistance close above current levels around 1.2765, but strong upside momentum could mean we break above here over the next few days, which would open the way to the next level highlighted on our chart around 1.2875. 

  Buyers of the Euro looking for further gains should consider placing a stop order in the market to protect against renewed weakness, especially in light of the fact that we have seen several previous rallies to these levels that have been rebuffed.

Currency Forecast - Sterling Vs. Euro 18th July 2008

  Sterling has made some gains this week after finding support just ahead of the 1.2450 level that has produced similar reactions back in May and June. 

  The ongoing theme in the markets is that of rising inflation, and the impact this is having on monetary policy.  In Europe the ECB raised interest rates to 4.25% in July, but so far the Bank of England have kept rates steady at 5%.  Next week the minutes from the last Bank of England meeting are released, and may give an indication that policy makers here are maintaining a hawkish bias.  However, with the increasing threat to growth, and with most analysts focussing on the fact that inflation in the economy is mainly imported, it looks as though the Bank of England will remain on the fence for some time to come.  That does not help sterling's prospects when you consider how hawkish the ECB stance has been, further reiterated in comments by ECB chairman yesterday.

   

Currency Forecast - Sterling Vs. Euro 12th July 2008

  The Bank of England held interest rates steady at 5% on Thursday in a widely expected outcome.  The no change vote was met with little initial reaction from the markets, and we will have to wait for the release of the meeting minutes on Wednesday 23rd July to get a flavour of how the nine member panel voted. 

  Sterling was left on the back foot for the remainder of the week, not helped by new reports of house price declines from HBOS.  The Sterling/Euro rate closed right at the week's lows on Friday, leaving a strong likelihood of further downside early next week.  There's plenty of data due for release in the UK, starting with PPI (inflation) on Monday morning, retail sales early Tuesday morning, the RICS house price survey Wednesday morning, and key unemployment figures at 09:30 Wednesday. 

  The technical outlook has deteriorated sharply in the last week.  We closed below trend support on Thursday and are now trading close to the May and June lows at 1.2450.  This level provided support over the last two months, so a break below here would be another blow, opening the way to the April lows (also the all time lows) at 1.2350.  Euro buyers should be extremely cautious given the worsening technical outlook and plethora of potentially market moving data during the week ahead.

What Next?

   

Currency Forecast - Sterling Vs. Euro 4th July 2008

  The Euro fell sharply yesterday after the European Central Bank raised interest rates by 0.25% but failed to indicate further rate hikes in the pipeline.  Markets had been expecting hawkish comments, but instead ECB chairman Jean Claude Trichet suggested that the rise to 4.25% should be enough to contain inflation for now.  This allowed sterling to recover from the week's earlier losses, and we are now trading at similar levels to last Friday.

  The Bank of England meet next Thursday (July 10th), and are expected to keep interest rates on hold at 5%. 

   

Currency Forecast - Sterling Vs. Euro 27th June 2008

  News this morning confirmed that UK first quarter growth was revised lower to just 0.3% from 0.5% previously stated.  The Office for National Statistics says this brings the annual growth rate down from 2.5% to 2.3%.  Sterling initially dipped on the announcement at 09:30, but has since erased the losses.

   

Currency Forecast - Sterling Vs. Euro 19th June 2008

   

Currency Forecast - Sterling Vs. Euro 18th June 2008

  Sterling fell sharply after Today's Economic Data yesterday showed that inflation rose to 3.3% in May, the highest level since records began in 1997, and well above the Bank of England's 2% target.  The Bank of England are in a quandary between raising interest rates in order to fight inflation, and cutting them to help revive the slowing economy. 

   

Currency Forecast - Sterling Vs. Euro 13th June 2008

  Sterling put in a strong rally on Monday as new data showed that producer price inflation reached the highest level in twenty years, adding pressure on the Bank of England to keep interest rates at 5%.  In terms of the Sterling/Euro rate, this roughly offsets last week's comments from the European Central Bank signaling a rise in interest rates over there.  The surprisingly high inflation figures are certainly bad news for the economy, but help to boost the pound as investors re allocate capital in search of higher yields. 

   

Currency Forecast - Sterling Vs. Euro 5th June 2008

  Both the Bank of England and the European Central Bank kept interest rates on hold at 5% and 4% respectively at today's meetings.  However, the ECB gave a strong indication that they may raise interest rates in July.  In what he referred to as a "heightened state of alert", ECB president Jean Claude Trichet signaled that rates may have to rise in order to combat increasing inflationary pressures.  Second round inflation from the surge in commodity and fuel prices over the last 12 months can be expected to support the high inflation outlook over the medium term.  While a rate hike is not a certainty, markets are now pricing in a strong possibility of a 0.25% move in July or August.

   

Currency Forecast - Sterling Vs. Euro 1st June 2009

  Sterling continued its recovery into the end of last week, making the  largest weekly gain since March 2007 .  Weak European economic data overshadowed more bad news for UK house prices, allowing the pound to rise against a weak Euro. 

  This week we have interest rate decisions in Europe and the UK (Thursday).  Both central banks are expected to keep interest rates on hold, so the markets will be keenly watching the ECB press conference for any signs of policy shifts (unlikely given the high level of inflation).  Traders will have to wait until June 18th for the minutes of the Bank of England meeting.  With both banks expected to hold rates steady this month, focus will fall on any new growth and inflation data.  Manufacturing data for May is released on both sides of the channel Monday morning, followed by data on the services sector on Wednesday morning.

   

Currency Forecast - Sterling Vs. Euro 29th May 2008

  Sterling has been in recovery mode this week as poor economic data from Europe dented sentiment toward the Euro.  Business and consumer confidence figures both showed weakness, allowing the pound to gain the upper hand despite further confirmation of a slowdown in the UK housing market.  A report from the Nationwide this morning showed price falls of 2.5% over the last month, the largest monthly fall since records began in 1991.  This was also the seventh consecutive decline, the longest period of falling prices since 1992. 

  Despite the endless flow of weak data, and renewed calls for an interest rate cut, the technical outlook is improving slightly.  Sterling could now rise toward the early May highs above 1.2800, but it would take a close above 1.2870 to end the downtrend that began last September. 

   

Currency Forecast - Sterling Vs. Euro 21st May 2008

  The Euro surged this morning after a report on German business confidence came in stronger than expected.  The IFO index rose to 103.5 in May, up from 102.4 in April, defying market expectations of a small decline.

  The positive Euro data drowned out the Bank of England minutes, which confirmed that 8 of the nine member committee voted for no change in interest rates at the April meeting.  This helps to firm up current expectations of no further rate cuts in the short term.  Sentiment toward sterling remains weak, and is not helped by the pound's failure to rally on this data release.

   

Currency Forecast - Sterling Vs. Euro 19th May 2008

  Comments from Bank of England governor Mervyn King last week put a question mark over whether the inflation outlook leaves the Bank of England with enough scope to lower interest rates in June.  While stating that we are at the end of the "nice" decade (non-inflationary consistent expansion), the governor cast a gloomy assessment of growth, while also pointing out that inflation is likely to continue rising in the short term.

  The reduced chance of a rate cut could have been expected to help sterling last week, instead of which the pound only managed to tread water against the Euro. 

   

Currency Forecast - Sterling Vs. Euro 12th May 2008

  Sterling drifted lower throughout last week, despite the Bank of England's decision to keep interest rates on hold at Thursday's meeting.  Markets quickly factored in an increased chance of a rate cut at the June meeting as a result.  Further evidence of a slowing economy also contributed to downside for the pound including a fall in consumer spending and more evidence pointing toward a fall in house prices.

  Meanwhile, the European Central Bank also held rates steady at 4%, and gave strong hints that there will be no rate cuts in the short term.  This helped to keep the Euro well bid toward the end of the week, and sterling has only found support in the last few hours, having traded well below 1.2600 on Friday.

   

Currency Forecast - Sterling Vs. Euro 2nd May 2008

  Sterling has made further gains this week, trading above the key 1.2700 resistance for the first time since early April.  The tentative recovery was further boosted yesterday after positive comments on the UK economy from the Bank of England's financial stability report.  Coupled with firm inflation data, the chances of a further interest rate cut in May are rapidly receding.  This is helping to buoy sterling, opening the way for further possible upside in the short term.  The next major resistance level is 1.2900.

   

Currency Forecast - Sterling Vs. Euro 25th April 2008

  The Euro was on the back foot yesterday after a report showed that money supply grew less than forecast in March, and a seperate report on business confidence was also gloomy.  Sterling is now challenging last week's highs, and a close above 1.2700 would be enough to improve the technical outlook and open the way for further gains next week.

   

Currency Forecast - Sterling Vs. Euro 23rd April 2008

  Sterling retreated sharply from last week's highs after the Bank of England finalized plans to allow banks to swap mortgage backed securities for government bonds.  The move has been seen as positive for the banking sector, and should help revive interbank lending, but sterling retreated nonetheless. 

Ratings agency Fitch said that the scheme is relatively safe for the Bank of England, because only the highest rated mortgage backed securities can be swapped, and any bonds that lose their "AAA" status must be replaced with other appropriately rated bonds.  The Bank of England and the taxpayer can only loose out if the bank becomes insolvent.  Since the value of any collateral used in the scheme will be discounted, this provides added protection. 

Currency Forecast - Sterling Vs. Euro 17th April 2008

   Sterling had its strongest session in over three weeks yesterday, surging from new all time lows set on Wednesday.  Luxembourg's finance minister Jean-Claude Juncker yesterday described the Euro's recent strength as "undesirable", pushing the currency down sharply in afternoon trade.  However, Budesbank president Axel Weber went some way to offsetting this sentiment by commenting on the ever present inflation risks that have kept the European Central Bank from cutting interest rates over recent months. 

  Also hitting sentiment toward the Euro were comments from speculator George Soros, saying the Euro cannot replace the dollar as the world's reserve currency.

   

Currency Forecast - Sterling Vs. Euro 14th April 2008

  The Euro opened lower this morning after comments made at the weekend G7 meeting expressed concerns over recent sharp currency fluctuations.  While no new policy initiatives were announced, markets took the comments as a signal that G7 members see the strength of the Euro, and weakness of the US dollar and Sterling as an unwelcome development, raising the prospect of possible intervention down the line.  The only realistic prospect of redressing the balance would be for Euro ministers to be persuaded to cut interest rates. 

The European Central Bank has maintained a hawkish stance throughout the credit market turmoil, while the US Federal Reserve have aggressively cut interest rates, and the Bank of England have made more modest reductions in the benchmark lending rate.  This contrast in central bank policy has caused a sharp appreciation for the Euro, which has become a highly favored currency amid poor sentiment toward the pound and the dollar.  The US and UK share a high exposure to the sub prime mortgage debt that triggered the global credit crisis last year.  The European banking system is not as exposed.

The slowdown in the US economy, and the recent weakness in the UK housing market are also weighing heavily on both currencies.  To some extent, the recent strength of the Euro is well justified, and to a lesser extent the severe weakness in the pound.  However, the prospect of a US slowdown will inevitably have a knock on effect for European trade, coupled with the effect of a strong Euro which makes Euro exports more expensive for foreign buyers. 

At some point in the near future, the ECB will probably view the rising threat to growth as outweighing the ongoing specter of inflation.  If and when they signal a cut in interest rates, some of the recent support for the Euro should wane, and we would expect a sizable market correction.  Sentiment toward the pound has been reaching extreme lows, which also means there is plenty of room for a potential rebound over the next few months if sterling can emerge from the credit crisis with some credibility intact. 

Currency Forecast - Sterling Vs. Euro 8th April 2008

  Sterling is sliding back toward all time lows after a Halifax report released this morning showed a 2.5% fall in UK house prices, the largest monthly fall in over 15 years.  Analysts had been expecting a far more modest 0.4% decline.  This news boosts the chances of an interest rate cut on Thursday.

  Both the Bank of England and the European Central Bank are meeting Thursday, with the Bank of England now widely expected to cut, and the ECB expected to keep rates on hold at 4%.

   

Currency Forecast - Sterling Vs. Euro 3rd April 2008

  Sterling has made cautious gains against the Euro this week amid a growing sense of anticipation leading into next Thursday's Bank of England interest rate decision.  Most analysts are expecting a quarter percent rate cut, taking the benchmark lending rate down to 5%.  Bank of England head of markets, Paul Tucker said in a speech yesterday "the broad policy strategy is to offset some but not all of the adverse shock to demand from tighter credit conditions". 

In other words, the central bank will provide some relief to the slowing economy and shaky housing outlook, but will also remain mindful of rising inflationary pressures.  A report this week showed producer prices rising to the highest level in nine years, an indication that manufacturers are passing higher costs to the consumer, stoking inflation. 

Currency Forecast - Sterling Vs. Euro 28th March 2008

  In yet another blow to the already fragile pound, an index of consumer confidence declined to the lowest level in 15 years as house prices data revealed a 0.6% monthly fall in prices during March.  These data increase the chances of a rate cut from the Bank of England next month (meeting April 10th).

  Other data this morning showed the UK current accounts deficit narrowed sharply in the 4th quarter of 2007 as profits of foreign owned banks slumped due to the credit crisis.  The income balance accounted for the improvement, and the net deficit in goods and services was almost unchanged.  The deficit with the EU increased to £13.6bn from £10.7bn in Q3, despite the weaker pound/euro rate making UK goods and services cheaper for European buyers.

   

Currency Forecast - Sterling Vs. Euro 25th March 2008

  Sterling ended last week on a positive note after seeing some large daily swings.  Despite apparently unfounded rumours of another UK bank failure sweeping the stock markets, the pound managed to recover its losses and close almost unchanged on the week.

  The shortened week ahead is rather scant on the data front, with the German IFO Index leading the European figures on Wednesday, and UK house price data on Friday.  Market expectations are for the Bank of England to wait until May before possibly cutting interest rates to 5%.

   

Currency Forecast - Sterling Vs. Euro 17th March 2008

  Sterling has plunged to new all time lows against the Euro this morning amid the deepening turmoil in the world's financial markets.  This is more a story of Euro strength than Sterling weakness.  The news last night that JP Morgan is to acquire ailing Bear Stearns for just $2 per share (compared to Friday's closing price of $30) sent shockwaves through the financial system and pushed the US dollar to a new all time low against the Euro and a 12 year low against the Yen. 

Because Sterling is perceived as suffering from similar problems to the US currency (ie..a banking system with high exposure to sub-prime mortgage debt) the pound has opened unchanged against the dollar, and sharply lower against the soaring Euro . 

Currency Forecast - Sterling Vs. Euro 11th March 2008

  The Euro is getting the better of Sterling again today as the dollar's slide accelerates.  A strong German ZEW report (measures business and investment confidence) helped the Euro this morning, also aided by a tailwind of dollar selling.  Nervousness ahead of tomorrow's budget report has also made the pound weak relative to the Euro.

   

Currency Forecast - Sterling Vs. Euro 10th March 2008

  After testing the recent lows again on Thursday, Sterling made modest gains toward the end of last week, boosted by the ailing US dollar and an increasing recognition that the pound offers a reasonable yield in comparison to the Euro.  The pound ended the week in positive territory despite hawkish comments from ECB chief Jean Claude Trichet.  This could signal a slight change in sentiment toward the UK currency, which has plunged over 10% against the Euro in the last six months.

  Factory gate prices rose sharply again in February according to Today's Economic Data by the ONS this morning, though the 5.7% annual rate of price increase was slightly lower than the 5.9% expected.  Other data for the week ahead include UK January trade balance on Wednesday, followed by the budget, also on Wednesday.

   

Currency Forecast - Sterling Vs. Euro 5th March 2008

  Sterling was sliding to new all time lows against the Euro this morning before a report on the UK services sector helped the pound recover the early losses.  Economic activity in the sector unexpectedly rose from 52.5 in January, to a reading of 54.0 in February.  Analysts had been expecting a slight decline.

  The Eurozone measure of service sector growth also came in above expectations, but was tempered by acute weakness outside of the key German and French markets.  Readings for Spain, Italy and Ireland all showed contraction.

   

Currency Forecast - Sterling Vs. Euro 28th February 2008

  Sterling fell against most major currencies yesterday, dragged down by negative sentiment, not helped by the surging Euro, which continues to be well supported as the market scaled back expectations of an ECB rate cut.  Markets had been pricing in a chance of a rate cut after more dovish comments were made at the last ECB meeting, but strong data on business confidence and German unemployment (falling to a 16 year low) have pushed back any chance of a cut in the near term.

  Also hitting the pound are fears that the UK economy will be less resilient than Europe in the face of a US slowdown. 

  Data on house prices, mortgage applications, consumer credit and consumer confidence are all scheduled for release on Friday morning (07:00 - 10:30)so we could see some market reaction.

   

Currency Forecast - Sterling Vs. Euro 27th February 2008

  The Euro has firmed again over the last few days as the chances of an ECB rate cut at next week's meeting recede.  Comments at the February ECB press conference left some room for possible monetary easing, but a report yesterday showing strengthening business confidence in the Euro zone helped push the Euro to an all time high against the US dollar, with the currency little changed against the British pound.  The yield on short dated Euro interest rate futures rose by 4 basis points to 4.19% after yesterday's report, indicating a minimal chance of a rate cut next week.

   

Currency Forecast - Sterling Vs. Euro 19th February 2008

  Sterling is still plagued by negative sentiment, mostly concerning the beleaguered banking sector.  Northern Rock's nationalization sent a ripple through the market yesterday, leading to further losses for the already weak pound. 

  Wednesday sees the release of the minutes from the last Bank of England meeting.  This could give further clues as to the likelihood (or otherwise) of another interest rate cut.  Recent inflation data suggests that the scope for any further easing will be limited, though this has failed to provide support for the pound so far. 

   

Currency Forecast - Sterling Vs. Euro 15th February 2008

  Sterling is trading sharply lower today, driven by fears that UK banks will have to announce further write downs over the coming months after reports that Swiss bank UBS will report further losses upto 18bn US dollars on it's portfolio of CDOs (collateralized debt obligations).  British banks are known to be heavily exposed to CDO's, and most bank shares are trading around 2-3% lower this afternoon on the London Stock Exchange. 

   

Currency Forecast - Sterling Vs. Euro 14th February 2008

 The governor of the Bank of England painted a gloomy picture of the UK economy for the year ahead at yesterday's quarterly inflation report.  Citing rising inflation and flat house prices, Mervyn King noted the weakness in the pound as a potential bright spot for UK exporters.

  Sterling's reaction to the report was a non-event, as fears over an economic slowdown were largely offset by the comments on inflation, which suggest that price rises will limit any further rate cuts, which helped the pound to tread water or make modest gains against most other major currencies.

   

Currency Forecast - Sterling Vs. Euro 11th February 2008

  Sterling is trading unchanged against the Euro since last week's central bank meetings.  The Bank of England cut interest rates by 0.25% and the European Central Bank kept rates on hold as expected.  The only upset was the surprisingly dovish rhetoric from the ECB, suggesting that an interest rate cut may be necessary over the next few months.  Previous policy statements had been characterized by tough talk on inflation, making Thursday's change of tone highly significant.  We expect the Euro to remain on the back foot while speculation over a possible rate cut builds over the next few weeks.

   

Currency Forecast - Sterling Vs. Canadian Dollar 7th February 2008

  Sterling has been drifting lower again over the last few days, taking us back toward the January lows around 1.9400.  We may yet find support at this level, since it marked the low in December and January, but below there the only technical support is the 1.9020 low set in early November.  The market needs to close above the January high at 2.0360 in order to reverse the negative trend.

   

Currency Forecast - Sterling Vs. Euro 4th February 2008

  The Euro made gains on Friday after comments from a European Central Bank official reiterated their hawkish stance on inflation.  While other central banks including the Bank of England are cutting interest rates to combat a slowing economy, the ECB are more concerned that any reduction in interest rates could allow inflation to run away to the upside.  The ECB's primary mandate is to "promote price stability in the medium term", so there will need to be more evidence of a slowdown, or clear signs of moderating inflation in the Euro zone before ECB officials rebalance their attitude towards monetary easing.  The latest measure of consumer price inflation was above 3% for the third consecutive month.  Manufacturing data was also strong.

   

Currency Forecast - Sterling Vs. Euro 28th January 2008

  Sterling's rebound continued last week, helped by the release of the minutes from the January Bank of England meeting, which showed a strong consensus in favour of keeping interest rates on hold.  A cut is still widely expected at the February meeting.

  The pound is trading slightly lower in early trade this morning after the Nationwide house price survey revealed a 0.3% fall in the average house price during January, bolstering the case for a February rate cut.  The annual pace of house price growth slowed to 2.3%, the lowest since June 2006.

   

Currency Forecast - Sterling Vs. Euro 21st January 2008

  Sterling was making steady gains last week until retail sales figures for December gave traders another excuse to sell the pound.  Sales fell 0.4% on the month against expectations of a 0.2% gain.  Sterling has been pushing at the week's highs leading into the announcement, but fell by over 1 cent on the news.  However, Friday's weakness has already been reversed this morning, and we are once again testing the highs. 

  We remain cautiously optimistic of further gains over the short term , partly on the basis that sterling is deeply oversold, and also due to the market reaction to Friday's negative data.  Markets are not always rational, and in this case it appears that there is no appetite for a weaker pound despite the poor retail sales data.  If this is the case, we could see further upside over the course of the week.  Our first resistance level is 1.3480.  A break above here could trigger a deeper correction toward the next important level at 1.3660.  Clients who are hoping for further improvement should consider placing a stop order in the market in case of renewed weakness.

   

Currency Forecast - Sterling Vs. Euro 17th January 2008

  Sterling was already in the midst of a technical bounce yesterday when comments from a European Central Bank official sent the Euro tumbling for the first time in several weeks.  Governing council member Yves Mersch warned of possible downward revisions to 2008 growth estimates, citing the Euro's strength as a key factor, along with a general slowing of the US economy which could spill over into the Euro zone.

  The drastically overbought Euro was highly vulnerable to a correction before the comments, and subsequently fell 1.75% against the US dollar, and over 1% against the pound. 

   

Currency Forecast - Sterling Vs. Euro 14th January 2008

  The pound's recent decline now means that Sterling has weakened more than any other major currency in the past 12 months.  Part of the reason for the dramatic falls has been a growing expectation that the Bank of England will cut interest rates by 0.5%-0.75% through 2008 in response to a slowing economy and moderating inflation risks.  However, a sharply weakened pound actually helps the UK economy by boosting demand for British exports, while the price of imported goods rises (as sterling now buys less in foreign currency terms).  This rise in import prices could stoke inflation, and prevent the Bank of England from cutting interest rates to the extent currently expected.  This in turn should eventually help sterling recoup some of the recent losses.

   

Currency Forecast - Sterling Vs. Euro 10th January 2008

  Sterling is touching new lows this morning ahead of today's crucial Bank of England meeting.  Analysts are divided over whether we will see a second consecutive interest rate cut emerge from the announcement at noon today.  Clear signs of a slowing economy were compounded by news of poor trading figures from Marks and Spencer yesterday, and a warning about the retails environment through the remainder of 2008. 

  On balance a rate cut of 0.25% looks very likely, and sterling is already braced for such an outcome having fallen to new lows deposited encouraging signals earlier this week that suggesting that a temporary low might have been established.

  The European Central Bank also meet this afternoon but are widely expected to keep rates on hold at 4%.  The tone of the accompanying statement will be closely watched for signs of any softening in their previously hawkish stance against inflation. The Bank of England decision is at noon, so we will update you again shortly thereafter. 

 

Currency Forecast - Sterling Vs. Euro 3rd January 2008

  We return from the New Year break to find sterling hitting an all time low against the Euro.  In recent updates we projected a fall to around 1.3600 during the first half of 2008, but extreme pessimism over the UK's prospects relative to the Eurozone has reached fever pitch, and December's unanimous Bank of England vote makes further rate cuts a near certainty. 

Meanwhile the European Central Bank are still on hold, but I would certainly expect some softening bias to emerge over the next couple of months as the Euro's strength continues to hamper exports.  Until now the ECB has seen inflation as a larger threat than sowing growth, but the extreme currency movements we have seen over the last month may well change this view.

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