Pound to euro stable as central banks hold rates
The pound to euro exchange rate has stood stuck still within its 1.175-1.20 range this past week, replicating a pattern it has adopted since the start of 2012. This is because economic prospects in neither the UK nor the eurozone look set to impress, keeping fluctuations to a minimum.
The situation in Greece especially has topped the headlines this past week, and had the potential to send the euro into meltdown had it not turned out so well.
The Greek government conducted a debt swap, aimed at getting bondholders holding more than €200bn in Greek bonds to change their bonds for ones worth 75% less. Had they refused, Greece would have been refused its €130bn EU bailout and been forced to default, prompting the much-feared contagion across Europe.
In the event though, Greece’s creditors decided that triggering a financial apocalypse was not perhaps in their best interests, and more than 95% accepted the deal. Cue much jubilation among Greek and European Union public officials.
Elsewhere in Europe, the European Central Bank stuck to its guns regarding interest rates this week, holding its benchmark rate at 1.0%, in spite of the fact that Europe’s manufacturing and industrial base is grinding to a standstill.
Is President Mario Draghi waiting to see if the situation improves on its own? Perhaps. It’s also possible he’s giving the market time to digest the €500bn in loans he unleashed on European banks last month, before slicing and dicing at interest rates.
Nonetheless, if economic prospects in Europe continue to mimic a deflating balloon, interest rates could fall, and that would hurt the euro.
Outside Europe, the Bank of England held rates at 0.5% this month. It’s hence kept them at this record low (the lowest rate in the bank’s 317 year history) for three years to the month, and isn’t expected to change them until at least 2015.
What does this tell us? It tells us Governor Mervyn King thinks the UK economy is full beans, and he’s keeping interest rates low just to punish savers and Daily Mail readers.
No, in fact it tells us the opposite. It tells us the UK is still struggling to recover, meaning it’s crucial to have low interest rates to encourage lending to businesses. Of course, this is not news to boost the pound.
Looking ahead, it would take something momentous either in the UK or Europe to break the present GBP-EUR pattern. I can’t imagine what that would be, but then so often these things are a surprise!
I will of course return with my next foreign exchange update next week. If you have any questions about the exchange rates in the meantime, or about transferring money abroad in general, don’t hesitate to leave a response below. I’d be delighted to help.
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Pure FXPeter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.
Copyright: Peter Lavelle, Pure FX
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