Foreign Currency Exchange

Last week saw the announcement from Bank of England chief Mervyn King that Britain was about to enter a recession. This, coupled with Prime Minister Gordon Brown hinting of another rate cut, has meant that the Pound has taken a battering, falling to record lows against the Euro despite poor economic data from the Eurozone. After interest rate cuts on October 8th, many now expect another aggressive rate cut in order to ward off the looming, prolonged recession. With mounting pressure being put on the U.K for rate cuts, similar moves are now being considered by the E.C.B.

The housing market looks bleak with asking prices for U.K homes falling by 4.9% in October from a year ago. The quarterly poll from the Confederation of British Industry showed that conditions in the manufacturing sector are at their worse in 30 years. U.K GDP growth contracted by 0.5% from last quarter, much more than was expected, further highlighting the severity of the economic situation in the U.K.

Considering poor data in Europe as well as the U.K it was surprising to see the Pound sell off so heavily against the Euro, suggesting that Sterling may have been oversold a little. The immediate effect of this could be appreciation for GBP. With both economies looking equally dismal the GBP/EUR cross is likely to remain range bound from the low to high 1.20’s, in the medium term. Although in the short term this is most likely to remain a tighter range, therefore for those buying or selling Euros it may be wise to take advantage of any jumps in the market.