Euro rates breach 1.25, will it last? GBP/EUR and GBP/USD forecast
Sterling exchange rates crept through the 1.25 territory and closed in on a fresh four year high yesterday following the news that Cyprus is the next European country to seek assistance from the EU, bringing the total to five.
News emerged that Cyprus may need as much €10 billion, over half the size of its economy and equating to over €10,000 per Cypriot as European leaders will meet at a summit on Thursday and Friday, but they are not expected to come up with a lasting solution to the region’s problems that have also sent Italy and Spain’s borrowing costs soar.
Initial reactions have led to a fall in Euro exchange rates, creating what in my opinion are some very good buy opportunities, levels that I personally feel may not hang around for too long. Cyprus, although a problem, when put in context is Europe’s third smallest country and is unlikely to cause to many issues to the Euro zone and for this reason I feel the initial sell off we have seen may just be a knee jerk reaction. More pressing in my opinion, certainly for anyone with an interest in GBP/EUR, will be the outcome of the EU summit tomorrow and Friday (Angela Merkel has been quick to bury the idea of a common Euro Zone bond to share European debt) and also any short term moves from the Bank of England in relation to Quantitative Easing.
Bank of England shows concern
The outlook for Britain’s economy has worsened over the past few weeks due to turmoil in the Euro Zone and signs of deterioration in emerging markets, the Bank of England said on Tuesday.
The world was not half-way through a deep crisis and the euro zone turmoil was creating enormous uncertainty, leaving Britain at risk of a downward spiral if businesses postponed investment, Governor Mervyn King told a parliamentary committee.
“In the last six weeks… I am very struck by how much has changed since we produced our May Inflation Report,” he went on to say.
At the Bank’s latest interest rate meeting the monetary policy committee (MPC) was divided 5-4 in favour of not extending QE, however this to me clearly shows the first signs that QE is just around the corner and could be as soon as the Banks next meeting on the 5th July. The last time the Bank introduced QE the pound slipped against most major currencies and should this be the case next week I would expect a move back towards 1.23, therefore anyone buying Euros in the short term may wish to consider their options.
What next for cable? When best to buy the US dollar?
Recently the pound has gained ground against the US dollar clawing back from the lows at the beginning of the month (1.53) and creeping back towards the 1.5650 territory, but where now for cable? Personally I feel a move towards 1.58 will be seen should positive outcomes be seen from the EU summit; however should you have an interest in the dollar then watch out for UK and US GDP data on Thursday at 09:30 and 13:30 respectively. Figures from the UK are expected to remain at the revised -0.3% as seen in May, however across the pond figures are expected to drop from 2.2% to 1.9% and may lead to a fall in value for the dollar. However as with GBP/EUR the pound may well see gains curbed in the run up to next week’s interest rate decision, any announcement with regards to QE could wipe out any short term gains, possibly one to avoid.
To discuss my views and the outlook for any major currency pairing then please email Mike at mgv@currencies.co.uk
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