Currency Forecast - Sterling Vs. Euro 27th May 2009
Sterling caught a cold last week after credit rating agency Standard & Poor's moved its outlook on AAA rated gilts to negative. That's not an actual downgrade, but it is an indication that the extent of our quantitative easing measures and the dramatic increase in national debt is having an impact on the UK's investment status. The pound dropped sharply on the announcement, losing nearly two cents in just one hour. However, a steady recovery took hold, and by this morning we were actually breaking new highs. One of the more commonly used financial market proverbs holds that, "what should go down and doesn't go down can only go up". That neatly sums up last week's action.
The pound has been so oversold in recent months, and pessimism has reached such an extreme that investors are now numbed to it, and the market ultimately shrugged off the bad news. That reaction gives us further cause for optimism in the short term, and we are hoping to see more upside from Sterling over the next few weeks. The next technical barrier is the February high around 1.1575.
A break above there would be very significant for sterling, possibly indicating a further rally to the kind of levels that actually make us look forward venturing abroad this summer! As always, please take care in case the current rally starts to crumble. Last week was a timely reminder that anything can and will happen. Clients looking to buy the Euro should consider covering half of any requirement here while the going is good, and consider placing a stop order in the market to protect the balance.
Currency Forecast - Sterling Vs. Euro 20th May 2009
After a fairly harrowing fall from the 1.14 highs in early April the pound managed to find a foothold last week. The weakness back then was due to an increase in the level of bond purchases by the government, albeit announced on a day when the European Central Bank released similar measures, along with an interest rate cut. Sometimes the markets behave irrationally, and this was one of those occasions.
Since then we've had some better news, including an upbeat assessment of the UK's likely recovery from the Organisation for Economic Co operation and Development, who ranked the UK's chances of recovery as better than those of the US and some European nations like Germany. That helped sterling gain the upper hand against the Euro, and we are now challenging the April highs. We have bounced lower from current levels twice in the last month, so Euro buyers should remain cautious and consider placing a stop order below 1.1075 (last week's low) to protect against a similar reaction now.
A note on Libor. The key 3 month libor rate (the interest rate at which banks are willing to lend to eachother) has been ticking lower again over the last week, falling 7 basis points to 1.329% compared to a fall of 2 basis points in the previous week. With interbank lending rates now falling again, it appears that the credit crisis could be easing somewhat due to the quantitative easing measures adopted by the government. Sterling was one of the worst affected currencies, and may see some recovery if credit conditions continue to ease. In "normal" conditions Libor usually trades around 0.1 - 0.2% above the bank's base rate which currently stands at 0.5%. So there is still a large gap of 0.83%, much higher than historical norms, but nevertheless an improvement.
Currency Forecast - Sterling Vs. Euro 11th May 2009
Sterling fell sharply last Thursday after the Bank of England announced an extension to its quantitative easing programme, adding another £50bn to the pot. The markets focused on this story despite the fact that it was the Euro that was supposed to be in the limelight as the central bank cut rates to 1.0%. The ECB also surprised the market by announcing the purchase of £60bn in bonds, marking it's first foray into quantitative easing. Just like the UK, US and Japan, the ECB's plan is to expand the supply of money to the banks to loosen up cash further down the line and ease general credit conditions.
The Euro managed to shrug off the rate cut, and actually rallied against other currencies as investors judged the ECB's decision as well balanced and likely to "hit the spot". Meanwhile, polls also suggest that inflation in the Euro zone is running at just 0.6%, well below the bank's 2.0% threshold. That could leave the door open to further cuts to bring Euro rates in line with the UK and US. ECB chairman Jean Claude suggested as much by saying that this may not be the lowest point in the cycle. The International Monetary Fund the Euro zone is forecast to contract 4.2% this year, compared to 2.8% for the US and 4.1% for the UK.
Sterling plunged as markets increased their pessimism toward the pound after Thursday's news. The technical outlook has deteriorated sharply after the big reversal, and we are now heading toward technical support at 1.1000. This level may not provide much respite though, and the first key level is the trend line at 1.0850. Clients with Euro requirements should strongly consider covering them now.
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