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Euro climbs as ECB’s Draghi vows to do “whatever it takes”

The euro gained two cents against the US dollar, reaching 1.23, this week, as ECB president Mario Draghi promises to pull out all the stops to save the euro. But how will he back up his determined rhetoric?


Welcome to my weekly account of changes in the foreign exchange rate, covering the 20th to 27th July 2012. This is intended as a brief guide to what’s affected the euro this week, to help you decide the best time for you to change currencies.

Exchange rate changes:

Pound to euro: 1.2807 to 1.2804 (-0.023%).
Pound to US dollar: 1.5478 to 1.5692 (+1.383%)
Euro to US dollar: 1.2094 to 1.2297 (+1.679%)

What’s affected the foreign exchange rates this week?

1. Mario Draghi vows to save the euro.

It’s been a tough week for the US dollar, which has lost two cents apiece to the pound and euro. This is because, speaking yesterday at a conference in London, president of the European Central Bank Mario Draghi said that: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Given that the central bank can theoretically print unlimited sums, and even buy Spanish and Italian bonds, this sparked immediate confidence in the foreign exchange market, sending the pound and euro higher against their US cohort. Of course, though the euro is up today, the question is: What will Draghi actually do to preserve the common currency?

2. Moody’s puts Germany’s credit rating on ‘Negative’ watch.

Until recently, the consensus was that Europe’s core has remained immune to the debt crisis. Not any more though, as Germany’s crucial manufacturing sector shrinks to 43.3 in June (figures beneath 50.0 indicate contraction, and the lower the figure the steeper the fall.) As Chris Williamson, chief economist at Markit, puts it: “Germany is now contracting at the steepest rate for three years.”

Given that, credit rating agency Moody’s put Germany on ‘Negative’ watch this week, meaning there’s a 50.0% chance it could lose its AAA rating in the next year. The official response out of Berlin was to heap scorn on Moody’s. Yet, if the economic outlook continues to darken, there’s every chance Moody’s could carry out its threat. That in turn would see the euro decline.

3. The UK economy contacts 0.7% in Q2.

As of last week, it seemed the pound would breach 1.30 against the euro, as bad news out of Europe sent investors fleeing to the pound. But fresh reports that the UK economy shrank -0.7% in Q2 have put paid to that. Why the steep decline? The Jubilee bank holiday supposedly knocked 0.5% off growth, while wet weather also played a part. Yet, as Chancellor George Osborne notes, this is “not an excuse.”

Will the economy bounce back? Well, interestingly, there are those who say this data is too pessimistic. John Cridland, director-general of the Confederation of British Industry, for instance notes that among business on the ground, “the overwhelming view is that right now the economy is flat rather than negative.” Furthermore, unemployment has declined in the UK, sliding to 8.1% in June. So the pound could yet climb as growth returns.

What’s set to affect the exchange rates next week?

1. The Bank of England will make its latest interest rate decision.

In recent days, the central bank has talked about cutting interest rates from their present low of 0.5% to just 0.25%, in a further bid to encourage borrowing. Given the contraction of the UK economy this week, that now looks more and more likely. However, that though could send the pound down, as lower interest rates make investing in the UK less attractive.

2. The European Central Bank decides its interest rate too.

There’ll be huge pressure on the ECB next week, given Mario Draghi’s latest comments. He could begin buying Spanish government debt, to reduce bond yields in the country. He could also engage in quantitative easing, just as the UK has done. Both steps would support the euro. On the other hand, if the central bank disappoints next week and doesn’t announce concrete steps, the euro will fall faster than Wily Coyote off a cliff edge.

3. European retail sales figures are released.

These will tell us how confident shoppers on the continent feel, based on how much they’re spending on the high street (or calle mayor.) Last month’s figures were surprisingly upbeat, registering a 0.6% rise. That though remains 1.7% down on June 2011’s figures. If the data shows Europe’s consumers to be spending more, that will be a boon to the euro.

Get in touch: If you have any questions about sending money abroad, don’t hesitate to fill out your details in the reply box below. I’d be delighted to provide an in-depth response to your query, free of charge.

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Peter 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
Category: Expats
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