Pound Euro rates faced a torrid week last week, falling on Friday for the 7th straight trading session, a first for 2009. Rates dropped after a raft of poor UK data showing the economy is still in decline, coupled with the fact that forecast interest rate differentials caused the Euro to strengthen. The rate picked up slightly in trading on Tuesday morning, however poor PMI data compounded the problem with interest rate differentials, and so the pound is still performing poorly.
What does this mean?
Interest rate differential is simply the difference between our interest rate set by the Bank of England, and the Eurozone base rate set by the European Central Bank. If rates are higher in the Eurozone, then investors get a better return. This causes increased demand for the currency, and so as more investors purchase it becomes stronger and the net effect is lower rates. So, higher interest rates usually strengthen a currency, and vice versa.
Rates in the UK sit at 0.5%, while EU rates are at 1%. It had been the case that analysts thought the BoE would aggressively hike rates in the latter part of 2009. It’s now thought that EU rates will rise much faster than UK rates, which is what caused the Euro to strengthen. This coupled with poor UK data caused last week’s dismal performance by Sterling.
The pound recovered on Tuesday after taking a beating last week, when dismal UK business investment figures helped to further convince the market that UK interest rates would remain at a record low 0.5 percent for some time to aid the economy. However poor PMI figures which were worse than expected, caused the recovery to be short lived, and the downturn in Sterling exchange rates continued.
This week we see the ECB announce their interest rate decision, a hold at 1% is expected, but don’t rule out a rise to combat deflation.
Markets are extremely volatile at the moment, as the big movements in exchange rates last week demonstrated. This week we have various data releases from across the globe, which will no doubt cause further changes in exchange rates.
Markets are extremely volatile at the moment, as the big movements in exchange rates last week demonstrated. This week we have various data releases from across the globe, which will no doubt cause further changes in exchange rates.
Uncertainty is never good for business, but it does of course throw up opportunities for the bold.
Peter Elias (Agent Commercial), La Moinerie, 79500 Paizay le Tort, Deux-Sèvres
E-mail: allez-francais@wanadoo.fr
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