Sterling reached a high of around 1.29 against the single currency but slid back to just under 1.232 as the ECB began buying sovereign debt of beleaguered Eurozone nations – allowing countries to raise finance at affordable levels as yields on bonds, effectively the interest rate, fell.
Questions over the legality of the policy of “whatever it takes” to save the euro meant its value fell back and has for the moment settled at the 1.257 mark against the pound.
David Kerns, a market analyst with foreign exchange specialist Moneycorp, said the markets did not like the EU and ECB moves being questioned.
“Things are certainly not as bad for the euro as they were at the start of the summer,” he told RTN. “But every kind of initiative discussed and suggested by Europe and the ECB came under scrutiny after the initial euphoria as people questioned the legalities of what was proposed.
“And we find ourselves now, as the markets question the legality of the decisions, in mid-range. Nothing exciting is going on.”
David, who is also Moneycorp’s dealing manager for private clients, said at present it was difficult to estimate how the exchange rate would change in the longer term.
“Optimists say the euro is coming back and the so-called green shoots in the UK should strengthen sterling on the back of good news – that would be very nice instead of an exchange rate settled on which currency is the weakest.”
He said the UK’s position had improved slightly and, although at 8.1% unemployment remained “uncomfortably high”, recent data suggested jobs were being created but there were problems on the high street, JJB Sports not likely to be the last company to call in the administrators.
David said the manufacturing sector appeared to be strengthening, and while construction was below targets, the service industry was expanding well.
However, he said there were suggestions government borrowing could miss its target of £120 billion by £30 billion with August figures particularly bad. “However, you do get peaks and troughs.”
On the flip side, he said while Gross Domestic Product for the second quarter were a 0.5% negative “there is now hope for green shoots in the third quarter, with GDP being either flat or showing a small growth – that would be very encouraging. The figures are due in October.”
David said the Eurozone economic performance remained “extremely weak” despite the decline having been checked.
He said the German ‘powerhouse’ was under the microscope after business confidence appeared to be ebbing away – with little investment or job creation.
“The overall expectation for the GDP of the Eurozone is for it to slip into recession. Overall unemployment remains at a historic high of 11.3% - Spain as 25% and Greece 23%. That is very, very uncomfortable and in Spain, pretty dire.”
However, he said the Euro value improved with the “double whammy” of the ECB intervention and the German Constitutional Court ruling using the available 500 billion euros of Stability Mechanism Fund was legal.
And across the pond, the US Federal Reserve decision to “aggressively” use quantitative easing to buy bank mortgage securities – making new home loans available and affordable – had also increased the value of the euro rise against the dollar, and sterling fall against the single currency.
David said the German central bank continued to have “niggles” about the country’s role in rushing to rescue Eurozone neighbours. “The bank feels nations need to feel the pain of austerity.”
Further, he said there was the slight unease that Greece’s debt was not being reduced and she needed to borrow a further 15 billion euros. “What’s 15 billion between friends? The debt is moving in the wrong direction and there are still nerves about Greece being able to service its debt.”
They believe the pound – already at a three and a half year high and moving in the 1.23 to 1.258 range could break the 1.30 barrier and perhaps even reach the giddy heights of 1.35.
Moneycorp analyst David Kearns said the currency market was in flux because of Eurozone uncertainties over both Greece and the Spanish banks, especially giant group Bankia.
“It is very much about the euro’s weakness rather than the pound’s strength – it is the same old story and it has been the major driver over the last month,” he said.
David, dealing manager in the foreign exchange expert’s private client department, said the Greek ‘pro-bail out’ faction failed to win enough votes to form a coalition after the first poll while the ‘anti-bail out’ group led by political party Syriza was in a strong position.
He explained the ‘anti’ lobby was against the EU and IMF austerity measures and if they gained power on 17th June wanted to stay in the single currency although they aimed to renegotiate the package “and reduce the amount of public sector cuts and perhaps extend the time frame to make life easier for the Greek population.”
David added: “There is clearly an expectation that Greece could very easily leave the single currency, where before it was very unlikely.
“And the value of the euro is beginning to swing by the day depending on what the Greek opinion polls say, whether it is the pro or anti-bail out parties in the lead. It is very much politically driven.”
He said if Syriza gained a majority at the ballot box and took power “then in all likelihood there will be a very weak single currency very quickly and prices of 1.30 and even 1.35.”
However, David said if the pro-bail out parties New Democracy and PASOC won and formed a coalition “I would expect the euro to strengthen and the exchange rate to slip back to 1.20 against the pound. There is a lot riding on this election and we are in very worrying times.”
He said unfortunately Spain had come back to the forefront and it was placed there by concerns for the banking system.
David said the Bank of Spain had injected 4.5 billion euros into Bankia but the troubled group urgently needed another 19 billion euros of capital.
“The issue we have now is where the money is coming from. If it is through the tax payer, through the Bank of Spain, Bankia will be nationalised, like Northern Rock in the UK,” he explained.
“The central bank is very reluctant to do that and it would be very unpopular – they hope to attract European Central Bank funds for an influx of money into Bankia but that door has been closed by the ECB.”
He continued: “It is an awkward time to raise funds anyway but with a bank on the point of collapse, it is even more difficult.”
David said other Spanish banks were also in trouble and there was 50 billion euros of debt to be written down. “All banks need a massive injection of capital. One newspaper says to the tune of 180 billion euros.”
And he said the market was again talking of Spain as “too big to fail, too big to bail” yet government borrowing costs on 10 year bonds were already approaching the unsustainable rate of 7% - the level Greece, Portugal and Ireland needed help.
David concluded: “We keep coming to talk of Euro Armageddon but in the past it has always stepped back from the precipice – perhaps this time Greece will fall and the remaining countries could move together to strengthen the euro.
“But if Spain was to go it would be the end of the Eurozone because it is such a very, very big economy.”
Looking at the sterling v euro exchange rate for the past twelve months is interesting for two reasons. Firstly, over the 12 month period sterling has continually gained in strength. May 2011 saw the low point at a rate of 1.1221 and ran up to October 2011 peaking at just over 1.16. However, from October 2011 to date there has been a steady climb into the 1.20’s, peaking last Monday at just over 1.24 - which is great news for euro buyers.
This leads on to the second interesting point and that is fluctuation. Whilst there has been a steady climb in the rate that climb has shown constant ‘mini’ peaks and troughs. Only last week there was nearly a 1.5c difference over a two day period.
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Eurozone leaders have poured oil on the troubled waters of the currency markets by promising the launch of the European Stability Mechanism in 2013 – and a minimum pool of 700 billion euros of ‘guarantees’.
And while recession haunts the member states of the single currency, Britain’s growth prospects are pegged back by the financial pressures on one of its biggest export markets – the Eurozone.
Over the past month, sterling has moved in a typical range of 1.18 to 1.21 in value against the euro.
Market analyst David Kerns – who is also Dealing Manager for private clients at foreign exchange specialist Moneycorp – does not expect any great movement in exchange rates in the coming weeks.
“Moving forward, the Eurozone is stable. UK growth prospects are ahead of those of the Eurozone so perhaps we could see sterling move ahead but I do not think it will be as high as 1.25,” he told RTN.
“It will be fortunate for the pound to get to 1.22 against the euro in the near term but it only takes a wobble in the UK and everything could change slightly but we seem to remain in the current range. Things have calmed down.”
David said European leaders were “determined” to keep the single currency and “muddle through”, but added: “We have moved on from the dark hours and I am sure the euro will survive.”
He said the UK had avoided a double dip recession and it was likely figures for the first quarter would show growth at around 0.5%, increasing to possibly 0.9% over the year – and had crucially maintained its AAA credit rating.
“A reason for weakness in the UK economy is that the Eurozone is one of the major trading partners and it is in an awkward position with most of the 17 member nations in recession,” said David.
“Therefore, big part of the export market has a distinct lack of demand for UK products, which is bringing down our growth.”
Also holding back growth is the “major hindrance” of unemployment – a common factor across the EU – with inroads unlikely to be made to cut the dole queue until next year.
David said the further cuts in public sector jobs stretching to 2015 would make the position worse but the Coalition Government was seen to be doing well with austerity measures and reducing its borrowing deficit.
Across the Channel, he said Greece had received both its bail out cash and “walked away” from 105 billion euros of debt following the much publicised ‘haircut’ being accepted by lenders and a debt swap.
And David explained next year the new European Stability Mechanism would be launched, initially with 700 billion euros available in guarantees.
“It is a firewall and safety net of EU subsidies. In all likelihood they are guarantees that will not be called upon but purely by having the safety net in the background adds to greater confidence and greater confidence means the euro will continue to exist.”
He said Eurozone economies were really struggling and even the powerhouses of Germany and France were hurting. “Greece is still in a terrible position – the single currency woes have not disappeared but the fact there is this big firewall allows everyone to feel more confident.
“Things are fairly stable and calm and to have that firepower in the background is seen as stabilising, so Eurozone governments can focus on austerity cuts, raising taxes, and changing labour laws.”
TROUBLED GREECE has swallowed another round of austerity measures – helped down with another spoonful of bailout funds – to bring short term stability back to the Eurozone.
The unpopular measure, marked by violent protests and demonstrations in the streets, calmed market fears the Southern European state was about to default on sovereign debt repayment.
And the pressures on the euro itself were further eased by the European Central Bank (ECB) making another huge tranche of cash available through its Long Term Financing Operation (LTRO).
The moves increased the value of the euro against sterling. A month ago, the pound was trading in the 1.19 to 1.21 range, in the last few days this has fallen back to 1.17 to 1.19.
However, RTN was warned that while Europe’s debt crisis looked stable for the next month, continuing unrest in the Middle East and surging oil prices could still upset fragile Western economies by triggering inflation.
Moneycorp’s Adam Jordan said despite so much going with “very complicated news” the currency markets were largely “static.”
The senior private client dealer at the leading foreign exchange company said: “There is very limited movement in the exchange rate and through a narrow range which is frustrating for some people.”
He explained how the euro had rallied. “It is arguable that Greece is in a better position today than two weeks ago and the imminent threat of a messy default in March seems to be over.
“The bailout package has to be agreed and ratified by Germany but the immediate threat being removed has helped put the euro on a better footing.”
Adam said this meant Greece would have the money to service its debts through March and not default in the coming month. “That gives stability in the short term.”
And he said the ECB had given world equity markets a boost by making another 500 to 750 billion euros available to banks in three year 1% loans to banks – increasing liquidity and allowing them to trade while keeping government bond yields low. “This has worked before and is likely to do so again.”
At the same time the Bank of England has announced another round of QE, quantitative easing, with £50 billion being pumped into the UK economy and the indication there was more to come.
Adam said it could trigger a slight fall in the rate of exchange against the euro to the 1.17 to 1.18 range.
He explained both moves either side of the Channel were designed to boost trade and the economy. “It is the only way to move forward.”
However, Adam warned the markets could be hit by “difficult to predict” events in the Middle East, describing them as “known unknowns”, adding: “It is a great problem, tension is growing in Iran, the ongoing crisis in Syria, and oil prices are rising, which is very inflationary – in the UK oil is at an all time high.
“Inflation makes it difficult to install further QE, because that is inflationary in itself and it is the same all over the EU, if oil prices continue to rise it becomes a tremendous problem.”
He said if “panic” entered the market he expected sterling to perform well – the UK still enjoying a ‘triple A’ rating - but while the Eurozone remained stable the value of the common currency would hold up.