Foreign Currency Exchange

The Pound made gains against the Euro throughout the course of last week off the back of poor growth data in the ECB and dovish accompanying statement. The big news last week was in the interest rate decisions in both the UK and the Eurozone. As expected both were kept on hold however, overall the Pound emerged slightly stronger due to comments from the Eurozone discussing poor outlook. During the press conference after the ECB meeting, President Jean-Claude Trichet continued to warn that inflation was still a significant threat and commented that growth had slowed dramatically during the middle of the year. ECB council member Nout Wellink said that he didn’t expect any good news from the GDP figures out on Thursday this week and said they would act if they needed to regarding inflation pressures.

Recent comments from the ECB have shown that it is not just the US and the UK who have been affected by the credit crisis and that the kinks in the armour of the Eurozone are beginning to show and take an effect on the currency. It would seem very unlikely that the Eurozone would raise rates this year and if anything we might possibly see them drop rates towards the end of the year to Stimulate Growth.

Despite the concerns in the Eurozone, the cross between the Pound and the Euro is by no means set as the UK economy is still struggling. Monday saw the Pound lose ground it had recently made against the Euro as concerns over the health of the UK economy undermined the confidence in the currency. Similarly to the Eurozone the backdrop of a slowing economy has added to the dilemma for the Bank of England which has been prevented from cutting interest rates as it battles rising inflation.

The prospect of stagflation will certainly weigh heavily on both economies and those people buying Euros should certainly be wary of the difficult times. The recent gains on the Sterling/Euro cross should not be mistaken for sustained sterling strength rather uncertain and volatile trading. The tools available through your FCG account manager, such as forward buying and limit orders offer real protection when buying foreign currency during this difficult period.