Despite the Euro crisis affecting confidence in the UK, sterling is still holding much of the value that saw it hit close to a 3 year high against all currencies only last month. And this morning despite some very alarming Public Sector Net Borrowing Figures, the pound is holding favour. I believe this is all to do with the fact sterling is a more attractive bet than the other majors because it is attempting to deal with its debt problems, however unsuccessful this is proving. It is perhaps a case of being the ‘best of a bad bunch’ rather than a stand alone favourite.
Great news for anyone buying a foreign currency with the pound but will it remain?
Anyone considering a trade involving the pound soon should beware of yet more Quantitative Easing…‘QE typically weakens the currency concerned by increasing the money supply’. This is likely to be unleashed as soon as next Thursday and it is sure to cause the pound to fall in value. Regular Traders may cast their minds back to the Summer of 2010 when GBPEUR was just like today, up above 1.20. At this time we actually saw 1.2350. The situation on GBPEUR was almost identical to now. Confidence in sterling was high (despite the UK economy suffering), and confidence in Europe was low as a result of Greece and the debt crisis. By October the rate had dropped 11 cents to 1.12. I will repeat that statistic because it is very powerful. By October the rate had dropped 11 cents to 1.12!
This was all due to the fact the economic recovery in the UK was felt to be insufficient to warrant an interest rate hike in 2011 and more QE was likely. The similarities with today’s market is clear and athough QE is not quite the nasty word it once was (It was the first round of QE that helped push the pound down to near parity) I feel that anyone with an interest in the pound should be aware things could quickly deteriorate. There is in my most humble opinion more chance of the pound losing value in the next ten days than gaining value. So let us look at what else is ahead besides next Thursday’s announcement…
DATAWATCH – UK GDP Final Estimate Q1- Thursday 09.30 am. The UK is technically recession but just how bad is it? This release on Thursday could set the pace for movements in the next week on sterling.
Don’t forget that we also have the all important PMI surveys early next week. These Purchasing Managers Index surveys are very important snapshots of the relevant sector in an economy. Please read Mike’s post earlier this year on PMI for more information on PMI http://www.poundsterlingforecast.com/2012/05/03/sterling-hits-a-33-month-high-against-a-basket-of-currencies-on-a-trade-weighted-basis-but-euro-buyeres-be-wary-of-the-ecb-interest-rate-decision-at-12-45/
Monday 2nd July we have Manufacturing PMI, followed by Construction Tuesday 3rd July and Services 4th July. All of these really have the propensity to move the market and are worth being aware of if looking to buy or sell the pound.
The pound could easily drop a cent or two against most majors because of bad news although last week the increase in Bank of England members voting for QE caused the pound to dip briefly before making a recovery. If the same happens again, anyone selling a currency to buy sterling should be poised ready to act quickly should the pound rebound, or if there is no QE, the pound may rally on the relief factor. We have not really seen Sterling break in either direction on all the majors in the last few weeks so it could well be due some movement. If this is true the next 10 days of data could be really important. If planning any transfers it would be a real shame for you to miss out on these levels, particularly against the Euro. We are trading on GBPEUR at the best rates in over three and a half years!
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