Pound looks to consolidate gains against euro

Here is my latest update of the British pound to euro exchange rate, covering the 13th to 20th April 2012. This is intended as a brief guide to what’s affected the exchange rate this past week as well as what might happen next, to help you decide if now is the best time for you to change currencies.

Pound to euro:

+0.96% weekly increase
1.2223 (1.2107 a week ago)

+2.91% monthly increase
1.2223 (1.1878 a month ago)

This week:

1. UK unemployment falls. The pound has climbed to 1.22 against the euro this week (its highest rate since August 2010) as UK unemployment registers a surprise decline. Sterling also took ground from most other major currencies.

2. Spanish bond auctions succeed. Spain sold more bonds than expected at its two government auctions, although interest rates (or yields) rose a little. This has spurred hopes that Madrid has been granted a temporary reprieve from the markets, who were pushing it close to an EU bailout.

3. Tensions inside the ECB. German members of the European Central Bank crushed suggestions that the central bank might re-activate its loan program, as pressure from Germany to avoid stoking inflation intensifies. This though means discarding Spain’s best hope against a bailout.

In short then, this week has been all about pound strength and euro weakness. Reports of internal conflict inside the ECB, as well as ambiguous bond auction results from Spain, pushed the euro down as the outlook for the eurozone darkens. But at the same time, declining UK unemployment, in addition to strong hopes about UK growth next week, pushed the pound high, taking it to a 19-onth peak against the euro. This is hence a great chance to secure a good exchange rate.

Looking ahead:

Of course, the question is: can the pound consolidate these gains going forward? Here’s my sneak peak at what’s likely to affect the exchange rate next week:

1. The French presidential election. This could cause additional euro weakness, as the prospect of a Francois Hollande triumph at the first round polls this weekend has the markets spooked. Mr. Hollande has promised to rip up the recent eurozone fiscal union, claiming it doesn’t do enough to support growth, while also declaring a war on finance that includes a proposed top rate of income tax of 75.0%. Of course, this is the sort of thing investors dream about hearing(!)

2. German manufacturing figures. Last month German manufacturing contracted, signalling that the debt crisis has infected even the Eurozone powerhouse. If this trend continues, that could cause the euro to spiral further.

3. UK GDP figures. Performance in the UK’s crucial services sector has been strong in 2012 to date, spurring speculation that the UK can avoid repeating last quarter’s contraction. However, if the worst happens and Britain falls into technical recession, that could reverse the pound’s recent gains.

4. Spain. The eurozone’s fourth largest economy may have completed its bond auctions more or less unscathed this week, but that doesn’t mean it’s off the market radar. The Madrid central government will have to make quick progress in its debt reduction program, to convince investors it can steer the economy right and avoid fuelling panic. If it fails, that too could prompt further euro weakness.

I will of course return with my next update next week.

If you have any questions about changing currencies or transferring money abroad in the meantime, don’t hesitate to leave a reply in the box below. I’d be delighted to provide an in-depth personal answer to your enquiry.