Exchange rates in holding pattern as markets await central bank action
The euro has held more or less the same rate against the pound and US dollar for six weeks now, as the markets await ECB and Fed action. So what’s keeping them, and how will that affect you?
Welcome to my weekly account of what’s affected the euro exchange rate, covering the 10th to 17th August 2012. This is intended as a brief guide to the latest movements in the euro, to help you plan the best time for you to change currencies.
Exchange Rate Changes
GBPEUR: 1.2707 to 1.2717. No big change since broke 1.26 about 4-5 weeks ago.
GBPUSD: 1.5621 to 1.5712. But fell from 1.62 in May and since then hovering.
EURUSD: 1.2289 to 1.2355. Hovering at about this point for about 4-5 weeks.
What’s Affected The Rate This Week
The exchange rates sit more or less unchanged this week, with the euro moving less than a cent against the pound and US dollar. And in fact, if you look back, you’ll see that this has been the case for about six weeks now, with no major movements in any of these three currencies. You’d have to go back to June to see something big, when the pound broke 1.26 against the euro for the first time in years.
Holding Pattern as Central Banks Expected to Take Charge
So why is this? Well, it’s not as if nothing is happening in global economics. Retail sales in the United States jumped +0.8% in July, according to data released this week. The Eurozone meanwhile contracted –0.2% as a whole in the second quarter, which you’d think would have a big impact on the rates. Yet none of that is making much difference. Instead, what’s happening is that the markets are in a holding pattern, waiting for action from the European Central Bank and US Federal Reserve that could decisively impact the US and Europe.
ECB to Buy Spanish and Italian Bonds Again?
Hence, comments from German chancellor Angela Merkel that Germany is “in line” with the ECB approach to save the euro really got the markets excited this week. Yet the details of this plan, in which Mario Draghi will buy up Spanish and Italian bonds, in exchange for them accepting official bailouts, have not yet been revealed. It’s expected the Italian central banker will do so in September, which is why the markets are biding their time today.
US Fed to Initiate Third Round of Quantitative Easing?
In addition, hopes are high that the Federal Reserve too will step in September. Fed Chairman Ben Bernanke has said repeatedly he’d be willing to inject more funds into the US economy if it deteriorated enough, and since then signals have been mixed. As I mentioned, retail sales in the US jumped last month, which goes against the Fed printing more funds. Yet unemployment stubbornly remains above 8.0%, and it is after all part of the Fed’s mandate to bring unemployment down. Hence, the continued hopes for Fed intervention.
Given all that, it’s possible we’ll have to wait until next month before the euro starts really moving again.
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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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