Currencies Update

Pound

Pound falls on retail sales, BoE pessimism

Poor old pound! Sterling endured fresh losses against the euro and US dollar this week, taking the pound to its lowest point against the greenback since last June. This is down to falling retail sales and the Bank of England’s (BoE) bleak assessment of the UK economic outlook.

To start with, retail sales fell –0.6 per cent in January according to the Office for National Statistics, far worse than forecasts for +0.5 per cent growth. Insofar as the UK economy is driven by domestic spending, this cuts the odds for strong growth in early 2013. The data therefore sent the pound lower.

Secondly, Bank of England governor Mervyn King painted a bleak picture of the UK’s economic outlook last week, when he spoke at the bank’s Quarterly Inflation Report. King told journalists that UK inflation would continue above the BoE’s 2.0 per cent target, reaching as high as 3.0 per cent in the summer from 2.7 per cent now. He also played down the prospects for economic growth, predicting that UK output would only return to its pre-financial crisis peak in 2015. This means the recovery will have taken seven full years. Insofar as neither forecast suggests a thriving UK economy, King’s testimony sent the pound lower last week too.

What’s set to happen to the pound next? Looking ahead, I think sterling will continue to lose out against both the euro and US dollar. In part, this is because Mervyn King’s testimony last week was a forward-looking indicator. This means it told us what’s going to happen to the UK economy in the future. And, if the Bank of England governor is right, that’s nothing too upbeat. Second, there’s little denying the feeling that luck is against sterling at the moment. For instance, if you type ‘UK pound’ into Google Finance, you’ll find a range of articles talking about how the pound is a currency to sell, it has strong downward momentum, and so on. As such sentiments can be self-perpetuating, the pound will continue to fall. It’d take either a sudden turnaround in the UK economy, or a relapse of the Eurozone debt crisis, to change that.

Euro

Euro on pause as Eurozone shrinks –0.6 per cent in Q4

Elsewhere, the euro was all-but unchanged against the US dollar this week, as the Eurozone’s recession deepened at the end of last year. The Eurozone shrank –0.6 per cent in the last three months of 2012, the deepest contraction since the recession started in Q2. In particular, it’s notable that Germany, the Eurozone’s powerhouse, shrank –0.6 per cent last quarter too. This suggests it’s no longer immune to the continent-wide slowdown.

What’s going to happen to the euro next? I think the euro’s next move will be higher against both the pound and US dollar. In short, this is because the common currency didn’t really lose out against the pound or greenback last week, in spite of the deepening recession. I mean, if the UK entered a triple-dip recession, you can be sure it would spark widespread sterling losses. Yet just as sentiment is against the pound this year, so it seems to be with the euro. And if a deepening recession isn’t enough to send the euro lower, well, it need only take a little bit of good news to send it higher.

US Dollar

Talk of ‘currency wars’ could cause US dollar strength

Last of all, I think there’s potential for the US dollar to gain in the short term against the pound if not the euro. This is because the failure of the G20 to stem talk of ‘currency wars’ over the weekend will add to global uncertainty. This favours the greenback.

Meeting in Moscow over the weekend, the leaders of the globe’s twenty largest economies were supposed to allay fears of worldwide ‘currency wars’. In case you don’t know, this is where individual countries fight to lower their exchange rate, and so gain a competitive advantage over each other.

In particular, Japan has been accused of currency aggression in recent weeks, as it promises to print unlimited quantities of yen. However, given the differences that divide the G20, it proved impossible to agree on anything more than generalities in Moscow. A promise among member countries that ‘we will not target our exchange rates for competitive purposes’ amounts to very little. Hence, talk of global currency wars is likely to continue. That then will favour the greenback, as the biggest winner in times of global uncertainty.

Find Out More

So, sentiment is against sterling and with the euro, while talk of currency war will lead to more volatile exchange rates. To find out how all this will impact your foreign exchange transactions, feel free to visit us at foreign exchange specialists Pure FX, email enquiries@purefx.co.uk or call +44 (0) 1494 671800. We’d be delighted to give you an in-depth response to your query.

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