Sterling vs. Euro – 24th January 2011
January 24, 2011 Leave a comment
Last week started off looking like it should be another good one for the Pound, with a slight rise in UK house prices on Monday morning, and then a higher than expected jump in inflation to 3.7% (nearly twice the Bank of England’s target) early on Tuesday, which helped fuel a rise in the GBP/EUR rate to nearly €1.20 again as speculation grew that the MPC would be forced raise UK interest rates.
Graph Dec – Jan – 2010 – 2011
However as the chart shows, any initial optimism for Euro buyers was short lived. Even the better than expected jobs figures couldn’t help the slide in the exchange rate as we moved towards the end of the week. With investors refocusing on perceived weaknesses in the UK economy they started buying back into the Euro as expectations grew that Eurozone policy makers would arrive at a more durable solution to the current debt crisis.
This was topped off on Friday morning as UK retail sales figures were released for December 2010; showing a drop of 0.8% from the expected -0.2% reading. We knew the blanketing of snow the British Isles received in December would have hurt UK retailers, but we also hoped that the VAT increase in the New Year could have perhaps encouraged people to buy before the hike and offset any drop in sales due to the weather; unfortunately, this was not the case and Sterling exchange rates fell as a result.
We have various EU data releases this week (see “This Week’s Data” section below for more info) but we should all be more interested in what’s going on in UK where midweek news could set the scene for GBP-EUR movements for weeks to come. Tuesday brings the first reading of 2010 quarter 4th GDP (economic growth) figures which are expected to show that growth slowed again. The drop is expected to come down from 0.7% to 0.5% and while it doesn’t mean we are back in recession, it could be a sign that the government cuts are starting to take effect on the economy.
This kind of slowdown in growth could lead to potential stagflation (stagnating growth and rising inflation) and would put the Bank of England in a very difficult position whereby a hike in interest rates would help to cool inflation, but could seriously hurt growth and with more austerity measures to come the economy needs all the help it can get. The BoE minutes from this month’s meeting released Wednesday morning could give us more of an insight into their thoughts so we’ll have to wait and see, but on the flipside, better than expected UK growth figures and more bad news about debt problems in Spain and Portugal could easily help force the rate back up towards 1.20 again.
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