The truth of course is that
although we are certainly in deep water, we remain firmly hitched to Europe –
and not just by the Channel Tunnel.
Political relationships within
Europe may be undergoing a sea change, but the EU is still Britain’s biggest
export market. As the waves from last week’s storm subside a little, can we
chart the likely course of the pound against the euro?
"As many problems as the
euro one has at the moment I don’t think we will see a catastrophic slip in the
value of the single currency unless everyone’s worst fears are realised and a
break-up seems the only logical conclusion,” says Jeremy Cook, the chief
economist at World First.
“The UK economy is also full of
problems and although we are progressing at a faster rate than Europe, that is
not really saying much. I do not think we will see a 'double-dip' recession in
the UK but we will in Europe, and this fits in with our estimations that
GBP/EUR will grind higher over the course of the next six months to reach a
high of 1.23."
According to David Kerns, the
dealing manager at Moneycorp: “The pound has rallied against the euro over the
last day or so. The weakness of the euro reflects the currency market’s lack of
confidence in the EU treaty, whose €500 billion bail-out fund is not considered
enough. In fact, it will not even underwrite the debts of Italy which, it’s
worth remembering, stand at €1.9 trillion.
“The EU leaders’ talks over the
weekend served to prevent the euro from complete collapse, but we’re a long way
from a relief rally. The single currency remains very unstable, with further
downgrades by the credit ratings agencies looking imminent.”
[…]
"Furthermore, sterling is
likely to benefit from a slow but steady leakage from the eurozone into other
European currencies. This could set it up for a move back towards the 0.83
level (around 1.20 on GBP/EUR).”
[…]
Encouragingly, the pound was
buoyed up by some welcome economic news this week. The latest official trade
figures showed British exports rose in October by 8.7 per cent on the month to
a record 26.5 billion pounds – the biggest monthly rise since March 2006.
Notably, the greatest increase – 11.5 per cent – was to non-European Union
countries including the US and Asia-Pacific nations. With continuing problems
in the eurozone, will the UK’s increased success in developing other markets
boost market confidence?
[…]
Michael Derks, the chief
strategist at FxPro, feels we should highlight the positive: “It has been a
long wait, but increasingly evident is that the trade sector is making a
positive contribution to the painful rebalancing of the UK economy. In October,
the trade deficit narrowed substantially to £1.55 billion from an average 2011
monthly shortfall of £2.6 billion.
"Clearly, given the
incredibly troubling situation in Europe, this recent strength in exports will
be difficult to sustain, but it is encouraging nonetheless. Net exports are on
track to make a reasonably positive contribution to GDP in the current quarter.
Against the backdrop of sinking domestic demand it might just be enough to
prevent the economy registering a fall in GDP."
The past week also saw the
European Central Bank (ECB) drop its interest rate to one per cent while the
Bank of England (BoE) once again pegged rates. How will the markets view these
decisions?
“Sterling has been undervalued
against the euro for so long due to higher interest rates in Europe that many
have almost forgotten the fact,” says Nick Ryder.
“Once the panic died down
following the 2007-08 crash exchange rates revolved around investment yield.
The euro offered more return to investors than sterling with higher base
rates.”
Alistair Cotton, a corporate dealer with Currencies Direct, adds: “Now that the ECB have lowered interest
rates to their lower bound of 1 per cent, the pound should find that recent
gains against the euro are more sustainable. That said, in the near term the
pound-euro exchange rate will continue to trade in a wide range because of the
tendency of the pound to be heavily influenced by moves in the euro-dollar
pair.”
As well as pegging interest
rates, the BoE also voted to continue with the £75 billion quantitative easing
(QE) scheme started in October. Could this be seen as a mark of confidence in
current economic strategy?
“In the past, additional QE would
have been seen as a bad thing for a currency as it would be devalued by an
increase in monetary supply,” says Nick Ryder. “However, the reaction to the
recent round of QE has been positive. Markets seem to be applauding a proactive
approach from central banks. The current austerity measures have also helped
earn the UK a relatively good ‘end of year report’ despite stagnant growth.”
“Historically, loose monetary
policy with tight fiscal policy has been associated with a weakening currency,
but sterling has been fairly resistant over the last few months,” adds Alistair
Cotton.
“Markets are betting that there
will be more QE deployed in the New Year and that would normally imply that
confidence in BoE strategy was low, especially given sterling’s recent decline
against the dollar and commodity currencies. However, the markets seem to be
adding a premium to countries that have control over monetary policy and hence
currency. So for today at least, David Cameron’s veto is being treated as a
positive.
“Add to this the negative outlook
on European sovereigns and banks, and it seems that Britain, although struggling
looks like a less bad place to park your money – at least until Europe gets its
house in order.”
So could the pound be viewed as a
safe haven?
"Markets are now moving
money to safe havens and the UK is looking like a far better place to hold
funds than the eurozone,” says Nick Ryder. “However, the US dollar is the
ultimate safe haven, trumping sterling. The more panic we see over the coming
weeks and months as the eurozone comes unstuck, the more I expect sterling to
gain against ‘riskier’ currencies such as the euro and commodity based
currencies.
“Sterling has a good shot at
breaking €1.20/£1 for the first time since January last year, but it will
probably drop against the dollar.”
By Alison Brown
Original Source: Telegraph -
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