The following currency report will examine the factors that could affect Sterling exchange rates.
In January 2009 the Chancellor of the Exchequer Alistair Darling authorised the Bank of England (BoE) to set up an Asset Purchase Facility (APF), to buy high-quality assets financed by the issue of Treasury Bills, with the primary aim to improve liquidity in the credit markets. In March of the same year we saw the start of a 375bn Quantitative Easing (QE) programme, which was ultimately aimed at freeing the UK economy from its then current mire of debt and poor growth.
Fast forward to today and many will argue the scheme has worked, with the UK now boasting the 3rd fastest growing economy in Europe. This feel good factor has helped to push Sterling’s value up to a recent 7 year high against the EUR and helped the Pound trade above 1.70 last year against the USD for a sustained period.
However, despite this improvement many still argue that QE has only helped to pile further debt onto our economy, with the UK more in debt now than it was back at the start of the 2008 financial crisis. The BoE has faced much scrutiny over their decision, with many claiming they have only exacerbated inequality by helping the banks in handing them huge sums of money, whilst doing little to support small firms and households. Ultimately the banks QE programme did not tackle the key problems in our economy but despite these claims its supporters remained defiant, with one of its members claiming the QE programme had ‘added about 50bn to the overall level of GDP since its introduction’.
Whatever your views on the matter it is clear that the UK economy is performing better than it was when the QE programme was first initiated but many will argue this has as much to do with improvements in Manufacturing figures and in the jobs market, as it is does with the initiation of such an aggressive stimulus programme. This is why it is near impossible to compare it to previous stimulus measures, such as Nazi Germany’s version of QE, when they simply continued to print money until the circulated currency had lost any value at all.
Whether the recent introduction of QE in the Eurozone will have similarly positive effects only time will tell but the Eurozone certainly have many additional variables to contend with, including a huge differential between the strongest economies such as Germany and the weakest such as Greece. The Pound has clearly benefitted from this improvement, with GBP/EUR hitting 1.40 on more than one occasion recently but a word of caution remains. If we do see the Eurozone start to improve as a whole, then there is a huge scope for EUR improvement when you consider the recent history on the pair.
Looking ahead and today we have a host of key economic data releases, which are likely to cause additional volatility on GBP/EUR exchange rates. First we have UK unemployment data, which is expected to show a small improvement and then we have Eurozone Gross Domestic Product (GDP) figures, which are again meant to show an improvement. Following this we have the latest BoE quarterly inflation report and BoE governor Mark Carney’s subsequent statement. Every time Carney gives a public address we generally find Sterling’s value is affected, so anyone with a EUR requirement should be keeping a close eye on market developments this morning.
GBP/USD rates have once again improved, with the pair now trading back above 1.56 at the recent high. This is a stark improvement to recent times, with the greenback trading below 1.50 and showing no signs of relinquishing its grip over GBP. The main catalyst for that USD improvement was the general consensus that the US FED was likely to raise interest rates this summer. However, recent statements from head of the FED Janet Yellen have dampened these expectations and when you add the improvement seen in Sterling’s value since last week’s election results; it is easier to understand why this spike has occurred.
Looking ahead and we have a host of key data out for the US, including Retail Sales figures today and then employment and inflation data out tomorrow. I do feel Sterling will struggle to break back through 1.60 so the current levels should be considered for anyone with a USD requirement.
It’s been equally volatile on GBP/AUD rates of late, with both the Pound and the AUD threating to build momentum. Initially it looked as if the AUD may make a move back towards 1.90 and with the uncertainty created in the build-up to the UK election, this was looking like a distinct possibility. However, as often happens the currency markets can move aggressively and unpredictably and the Pound immediately gained market support following last week’s election result and the on-going concern over the slowdown in China’s economy. With China and Australia so inextricably linked due to their trade agreement; any slowdown in China’s economy invariably has a negative effect on Australia’s and ultimately the AUD.
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