Pound to euro hits 1.25 as Spain nationalises Bankia

Here is my latest update of the British pound to euro exchange rate, covering the 4th to 11th May 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’s the best time for you to change currencies.

Pound to euro:

+1.609% weekly increase
1.2504 (1.2306 a week ago)

+2.094 monthly increase
1.2505 (1.2129 a month ago)

This week:

1. The pound hit its highest rate against the euro since 2008, as well as breaking the hugely symbolic 1.25 point, as Spain’s nationalisation of Bankia as well as electoral chaos in Greece pull the euro down.

2. The Bank of England didn’t announce a fourth round of quantitative easing at its latest meeting, in spite of the fact the UK is in official recession. This is both to prevent inflation, which has remained stuck at 3.5% for two months, but also acts as a vote of confidence in the UK economy. This hence helped the pound maintain these strong levels.

3. The sharp deterioration of China’s economic outlook this week prompted Beijing to announce it will stop buying Eurozone debt. This removes one of the only remaining liquid sources of demand for Spanish and Italian government bonds, and increases the odds of these countries needing a bailout. That could send the euro lower in the immediate short term.

It looks like all stars aligned in the pound’s favour this week, as sterling experienced one its sharpest climbs against the euro since the financial crash. I think it goes without saying that this represents a good opportunity if you need to change pounds into euros. The reasons for the pound’s gains are multiple, but mostly derive from (1) Spain’s nationalisation of Bankia, which represents a sharp deterioration in the government’s balance book and (2) the arrival to dominance of several anti-euro parties in Greece. It’s never looked more likely that Greece will exit the common currency inside a matter of weeks. Given that, it’s quite possible (though this is just my opinion) that the pound could continue to climb in the weeks ahead.

Next week:

1. Greece is set to schedule a second general election, as none of the present parties finds it possible to form a government. This looks likely to result in the anti-euro parties gaining yet more support, which of course would pull the euro further down.

2. Eurozone growth figures for Q1 are released. These will almost inevitably confirm that the continent is in recession, although the scale of the contraction will determine whether the euro declines or not. If for instance the disparity between the German-led North and Mediterranean countries expands, that could prompt a euro sell-off.

3. The latest UK unemployment rate becomes known. UK joblessness unexpectedly dropped last month, and if this trend continues it could be pound-positive.

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, free of charge.