August Currency Update

It would be nice to say that sterling did well in the first half of July. It would be more accurate, however, to say the Euro did badly. In little more than a fortnight the pound climbed from a 16-month low to a six-week high, covering five full cents on the way.

There is still no enthusiasm for the pound among investors. They see persistent high inflation – 4.2% at the last count – and perennially low interest rates – the Bank rate has been at 0.5% since March 2009 and could quite easily see out the year at the same level. Personal consumption remains weak. One obvious reason for that is that personal incomes are falling: Average earnings rose by 2.3% in the year to May but inflation eroded their value by 4.2%. The net result is that the average family’s spending power fell by -1.8% over the 12 months.

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On the positive side employment is going up, albeit slowly, and the economy is growing, if only at a snail’s pace when the effect of inflation is stripped out. Figures for the second quarter showed gross domestic product expanding, in real terms, by 0.2% over the quarter and by 0.8% in the 12 months to June. It is a pathetic performance but perhaps not as bad as it looks. If inflation were on target at 2% that 0.8% would look more like 3%. Unusual factors such as the royal wedding and its extra bank holiday, the after-effects of the Japanese tsunami, the first phase of Olympics ticket sales and record warm weather also served to dampen growth. Without them the figure would have been appreciably higher, according to the Office for National Statistics.

Also on a positive note the government is sticking to its plan to narrow the gap between tax revenues and public spending. It is a painful process, for sure, and the slower than expected pace of growth makes it highly unlikely that the target of a balanced budget can be achieved by the end of this parliament. Nevertheless, the fiscal position of Britain is improving while in Ireland and southern Europe things are getting worse.

Greece is still the front-runner in the race to spend beyond its income. On top of the €45 billion pledged to it in April last year in the EU/IMF bailout package, EU leaders decided this July to lend another €109 billion or so (the exact number is not yet finally decided). In a nutshell, the strategy for solving Greece’s excessive debt problem it to lend it even more money.

Investors are suspicious about the whole thing. For two years they have been told by Brussels firstly that there was no problem, then that each of a succession of measures would sort out the problems of peripheral Euroland once and for all. This latest proposal from EU leaders does seem to have more teeth than its predecessors but it is hard to avoid the sensation that, once again, it is too little, too late.

The US debt crisis has rather hogged the headlines in the last couple of weeks, distracting attention from the euro zone’s woes. Also, with European leaders away on their summer holidays, it may not be until September that investors finally see some flesh on the bones of what is, so far, no more than a set of bullet points. In the meantime, investors will be left to speculate not about whether Greece will go bust but when it will finally happen and what the effect will be.

Working in the euro’s favour is the European Central Bank’s rigorous approach to inflation. Whatever the problems of Greece, Portugal, Spain, etc., the ECB sees inflation as a threat and is determined to head it off with higher interest rates. It raised its refinancing rate from 1% to 1.25% in April and to 1.5% in July. It is widely expected that there is more to come.

The bottom line is that investors do not much care for either the pound or the euro at the moment. The sterling/euro exchange rate is the same today as it was in early April and in the intervening period it has passed by that level at least once a week, on average.

What next? 

Call +44 (0)20 7428 4910 (Open Monday to Friday 9.00am–7.00pm)

> Open a Currency account today

> Request a call back

> Ask questions about Currency Exchange

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This entry was posted on Monday, August 1st, 2011 at 11:49 am and is filed under Bank account, Currency exchange, Finance, Money transfer, Property Investment . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


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