If you are buying Euro then the news that the conservative New Democracy party winning the Greek elections will have come as a blow as they are pro bailout as opposed to Syriza a leftist party who wanted to tear up recent Greek commitments to austerity measures. In my view the Euro will strengthen back slightly but the underlying problems in Europe and the debt crisis still remain.
The political impact has brought to a head many of the concerns about the loose economic foundations of the Euro and it remains to be seen if the Euro can now limp on to the next EU summit taking place at the end of the month given that Mario Draghi has said that “all the work we are doing is with a view to the next summit”. Expect a range comfortably over 1.20 in the near future but longer term expect a move down.
GBP exchange rates: At the Mansion House Speech last week, Mervyn King announced more would be done to stimulate the UK economy by making cheap loans available to UK banks in return for them making more affordable loans available to small businesses and individuals. It was stressed that the move was not an extra bout of Quantitative Easing and clearly the timing of the speech helped ensure that markets were aware UK banks could be flooded with money to avoid any financial contagion following a negative result in the Greek elections.
The move came as other Central Banks last week made it clear they would have sufficient financial power and tools to deal with the current financial instability with Mario Draghi at the ECB they were ready to act “where needed” and a Canadian government spokesman saying if there was “an external shock” Canada is “ready to act”.
Whilst the underlying aim of King was to protect UK banks from a Euro collapse it is also clearly a sign that the UK economy is still facing strong headwinds hence the need for another financial intervention by the B of E. Whilst it could help the UK out of recession which is good news for the pound in the long term, it could clearly peg the pound back in the short term due to a worsening economic outlook. With inflation data tomorrow morning, and the B of E Minutes and unemployment data on Wednesday, the markets will be looking for any signals that the situation in the UK is getting worse rather than better- if you are happy with RECENT/CURRENT levels for the pound then why not look at a forward contract and fix your exchange rate before the next UKGDP figures on the 28th June?
The pound has seen its value vary sharply against the greenback in recent weeks with significant movements on nearly every trading day last week, however most of these swings have been confined to within a 3 cent rage- the movement has largely been down to swings in global confidence depending on whether breaking news such as within the Euro zone, has been viewed as positive or negative.
Despite the fact Greek votes have been counted and the immediate crisis in Europe passing I still expect a degree of strength for the greenback because, as already mentioned, I cannot see the economic situation in Europe doing anything except getting worse in the short term.
A possible hurdle to recent Dollar strength from the “flight to safety” is the US interest rate decision this Wednesday. Clearly Bernanke will want to dampen some of the fires caused by the recent events in Greece and promote confidence but the issue of the US economy itself may demand further stimulus. Should the Fed maintain its commitment to low interest rates or hint at more QE Stateside then the Dollar could weaken. I still expect the Dollar to remain in a range of between 1.55+ and 1.58.
The Aussie Dollar is another currency that has moved significantly against the pound in recent weeks. After slashing interest rates, a slow down in the rate of growth in China (one of Australia’s biggest mining export markets), and fears over the Eurozone crisis the Aussie had weakened to over 1.60 against the pound only a few weeks ago. Since then the Aussie has strengthened back last week by up to 6 cents at points.
The main driver in the coming weeks is likely to be 1) any further chaos in Europe – escalation of fear would likely weaken the Aussie sharply as it is heavily susceptible to carry trading or 2) any hints from the upcoming RBA Minutes that Australia may cut interest rates again in the near future, even as soon as the next meeting in July. However in either of these instances I think the general weakness of the UK economy will weigh the pound down so we may not see 1.60 again for a while.
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