Sterling-Euro Updates

Peter Lavelle at Pure FX writes, is sterling set to be the big loser in 2013? I’ve heard several comments to that effect this week as the pound continues its sharp decline, notably against the euro. This week, sterling fell to its lowest point against the euro since October 2011 as investors place their bets as to what’ll happen this year. The general consensus is that, with the US economy picking up, and the Eurozone debt crisis receding, the UK is one of the worst-placed economies. This reflects the fact that the UK contracted –0.3 per cent in Q4 of 2012, putting us on course for a triple dip recession.

What’s going to affect sterling next? This week, there’s a lot of potential for sterling to keep losing out. First of all, Markit’s releases its monthly PMI of the UK services sector. This tells us whether UK services expanded in January and is important because it accounts for 3/4 of UK output. Alas, a contraction of 49.8 is forecast (figures beneath 50.0 signal shrinkage), which would see sterling fall further. In addition, incoming governor of the Bank of England (BoE) Mark Carney will appear before Parliament’s Treasury Select Committee, to discuss his views of UK monetary policy. Now, in recent speeches, Carney has argued that central banks should orient themselves away from fighting inflation so fixedly and focus instead on generating growth. That suggests he’s likely to ramp up the Bank of England’s printing presses when he takes the helm in July and would be sterling negative.

Meantime, the euro once more enjoyed smashing gains against the pound and US dollar this week, hitting 13-month highs against the pair of them. Funnily enough though, you’d be hard-pressed to find what particular announcement caused these gains. It’s not as if the Eurozone is out of recession or that the currency bloc’s members have taken another step to integration. Instead, this climb reflects a widespread view that the worst of the debt crisis is behind us. No longer is there an existential threat of the euro breaking up. That’s seen confidence increasingly return to the Eurozone, with a corresponding surge in the value of the common currency.

After a straight month of gains, I suspect we might begin to see the euro on the back foot before long. For one, French finance minister Pierre Moscovici told television station France 2 this Sunday that “the euro is strong, perhaps too strong in some regards.” This has sparked speculation that the Eurozone might intervene to weaken its currency, to boost exports, just as the UK, US and Japan are doing. The euro could sink as details of a government-wide corruption scandal emerge from Spain. Last week, leading newspaper El País published ledgers which seemed to show Spanish president Mario Rajoy receiving kickbacks stretching back to 1998. If Rajoy resigns over this, it would threaten Spain’s deficit reduction plan.

Currencies Update

UK Pound

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!

Euro

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. 

US Dollar

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 enquiries@purefx.co.uk.