September currency update

The conversation that seems to crop up with increasing regularity is the one about sterling/euro (and sterling/dollar for that  matter) going nowhere.  After its decline from €1.20 in the first quarter of the year sterling has seemed riveted to the €1.13. For those of us who earn pounds and spend euros this is not an ideal state of affairs but it has at least meant a period of relative stability over the last five  months.

 

But will it last? Or will everything kick off again once continental Europe returns from its August break and autumnal storms make London traders miserable and angry?  As usual, there are too many balls in the air to allow any solid or reliable forecast of where sterling/euro will be in one – let alone three- months’ time. Let’s count them.

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The greatest and most significant unknown is the fate of the euro itself. After two years of crisis, starting with Greece and now encompassing Italy and Spain,  European leaders are no closer to coming up with an answer to the southern Europe debt problem than they were to start with. They have wheeled out enough plenty of solutions: Too many, some critics would say. The latest was a second bailout for Greece, a country which, as you will recall, initially insisted it did not even need the first one. But they have been doling out aspirin, not remedies. The leaders have paid lip-service to curing the disease while only bothering to treat the most urgent symptoms.

 

At a bilateral summit meeting earlier in August Angela Merkel and Nicolas Sarkozy parted company with an agreement to improve cooperation between euro zone member states and to impose a tax on financial transactions. There was no mention of any increase to the European Financial Stability Facility, which would be swamped if it had to fund another bailout. They also dismissed the proposal to issue multi-government “euro bonds”, a strategy that many believe is essential. Since then, the European Central Bank has been propping up Spanish and Italian government bonds by the simple expedient of buying them. German President Christian Wulff sees that buying as “legally and politically questionable” and “way beyond the bounds” of the ECB’s mandate but, in the absence of any other plan, it is the only one going.

 

Compared to the clear and present danger in Euroland, Britain is on a relatively even keel. The incoming government implemented austerity measures more than a year ago, with the intention of bringing government spending and tax receipts back into balance in four years’ time. It will probably not happen within that time frame but the political will is there, in a way that the EU can only dream of. Economic growth in Britain is slow. Gross domestic product expanded by just 0.2% in the second quarter of the year. But Euroland did no better and Germany and France did worse. German growth was just 0.1% over those three months and in France it was 0.0%.

 

Yet investors still do not prefer the pound to the euro. It is probably because of the pound’s long and undistinguished track record of snatching defeat from the jaws of victory. There might be no crisis at the moment but you can be certain another will be along soon. It is defeatist talk, to be sure, but an awful lot of investors have that mindset and they do not find it easy to hold onto sterling when a cold wind whistles up Threadneedle Street or through Westminster.

 

Renewed problems in Euroland could allow sterling to make the upward break it apparently deserves. It is more likely, though that in a month’s time we will be looking at a sterling/euro exchange rate remarkably similar to the one we see today.

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 Wednesday, August 31st, 2011 at 3:17 pm and is filed under Bank account, Currency exchange, Finance, Money transfer . 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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