By Ben Simmons
Andy Scott, Foreign Exchange Dealer at HiFX discusses currency trajectories, noting that the euro's recent gains are being reversed, whilst Sterling has begun to regain its value.
“The euro has fallen against all of its major counterparts this week having rallied across the board last week following the 2nd Greek bailout being agreed by EU leaders. Sterling bounced back against the Euro having fallen to a 2 ½ month low due in part to Bank of England minutes that revealed two of the nine members voted for a larger increase in quantitative easing. This led to a short term shift in expectations that the bank may announce additional easing in the months ahead leading to Pound selling.
“The rally in the Euro was always unlikely to last as the attention turns to the broader fundamental picture in the Euro zone which has deteriorated dramatically as a result of the sovereign debt crisis. The sell off in the Pound also looked exaggerated as further easing by the BoE could be some way off and is far from guaranteed especially as the economic data for this year so far has been more upbeat.
“Most recent economic indicators paint a picture that the eurozone is in recession so the question is now how deep and long will it be? With significant austerity being implemented across the region there will be less economic output and increases in unemployment which compound the problem for cash strapped nations desperate for growth and tax revenue. Take Spain for example where unemployment last month reached 23% and the scale of the problem become clearer. These conditions aren’t supportive of a strong currency and compared to the U.K. the outlook is a lot more negative. If I were a betting man I’d also put money on Greece being an issue in the months ahead as they have to meet very strict conditions to receive each tranche of the €130 billion in loans and that has proved difficult. Add in the political uncertainty with elections due in France and Greece this year and you certainly wouldn’t want to be too heavily exposed to the single currency.
“We continue to favour the Pound to reach 1.25 against the Euro this year and would expect the Euro to head towards the 16-month lows around 1.26 against the Dollar.”
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