Sterling lost almost half a cent to the euro this week, putting an end to three straight weeks of gains, as Bank of England governor Sir Mervyn King used his Quarterly Inflation Report to seriously play down the UK’s growth prospects. (However, the pound was steady against the greenback.)
Speaking to journalists last week, Mr. King said that the UK faced “a long and winding road to recovery” (channelling the spirit of The Beatles) and said “growth is likely to fall back sharply in the fourth quarter.” Though he didn’t go further, this of course raises the strong possibility of a triple-dip recession in 2013.
In line with his comments, UK retail sales fell –0.8 per cent in October (a sharp drop) while inflation jumped to 2.7 per cent, raising the possibility of a continued squeeze on household finances. However, while all that looks bleak, it’s worth keeping in mind that Mr King wants a weak pound to help boost UK exports. He’s hence likely to play down the UK economy any way he can!
What will it take to see the euro fall again? The common currency claimed half a cent not just from the pound last week but the US dollar too, as foreign exchange investors seemingly ignored the fact that the Eurozone re-entered recession, while Greece is still a heartbeat from reviving the drachma.
The Eurozone contracted –0.1 per cent between July and September, putting it in the official recession everyone’s seen coming for months. Holland endured the biggest quarterly fall, shrinking -1.1 per cent, while the headline figure would have been much worse if not for the fact that Germany and France both expanded +0.2 per cent. Of course, with more austerity on the way, any recovery looks a long ways off.
Furthermore, Greece continues to face bankruptcy as Eurozone finance ministers put off the release of a €31.5bn bailout tranche. The FinMins are now meeting to decide if Greece at last warrants the cash. However, as I mention, the euro has gained in spite of all this dithering, as investors put seemingly endless faith in a solution to the crisis.
Last but not least, the greenback has endured small loses this week, as negotiations regarding the ‘fiscal cliff’ get off to a good start. This is $600bn in automatic tax raises and spending cuts due to be imposed unless US politicians can agree a sustainable fiscal path for the country and pay down the annual $1tn deficit.
Last Friday, Republican Speaker of the House John Boehner said initial talks had been “very constructive,” adding “I believe we can do this and avert the fiscal cliff that is right in front of us today.” US Treasury Secretary Timothy Geithner (a Democrat) meanwhile described the talk as “a good meeting, and the tone was very good. I think this is doable within several weeks”
This raised global optimism, leading the dollar to fall slightly. However, though initial talks may have gone well, there are still significant hurdles to overcome, and this is a process that will take weeks! Given that, there’s lots of potential between now and the 31 December deadline for the greenback to strengthen up again.
I do hope you’ve enjoyed reading this update. To find out how the latest changes in the foreign exchange rate will affect your money transfers, visit foreign exchange specialist Pure FX You can also call on +44 (0) 1494 671800 or email email@example.com.