There are four known currency pairs that dominate the percentage of trades. This are identified when buying and selling in the forex currency trading system market. These four currency pairs are the Euro vs. U.S. Dollar, the U.S. Dollar vs. the Japanese Yen, the U.S. Dollar vs. Swiss Franc, and the U.S. Dollar vs. the British Pound.
The euro remains very attractive against the pound and the dollar despite the ongoing problems presented by European Debt and the probable bailouts or defaults. It has been stated in which two thirds of European economists surveyed expect Greece to default on their debt. Last year such an announcement would have had the markets in absolute turmoil, indeed much of last year’s weakness on the euro was due to the debt crisis.
This year despite the well publicized problems in Portugal, Ireland, Greece and Spain the Euro remains a very unattractive prospect for those looking at buying overseas property. This is due to a number of factors which I mentioned and explained in detail below:
– EFSF – The European Financial Stability Facility is designed to act a safety net for indebted European nations. The fund has recently been made permanent and has given the markets the confidence that the ECB and stronger Euro zone members are serious about coming to the financial aid of the weaker members – a criticism levied at many members. As discussed European Debt concerns had been a major weight on the euro last year but now the issue is well known and appears to be being dealt with confidence has been restored. It is worth noting that longer term this is likely to be the issue that could present Euro weakness as concerns arises over the inability of the indebted nations to repay their debts.
– Interest Rate Decisions – The UK looked almost certain to have a rate hike in the first quarter of this year and the pound made strong gains on the euro as investors positioned themselves for the event. We then had a barrage of data releases showing that in all probability the UK wasn't ready for a hike and as such these positions were unwound and led to sterling weakness. Conversely the Euro zone has been floating the prospects of an interest rate hike as soon as next month. With unemployment falling it appears the Euro zone may have turned a corner and will be the first to stomach a rise in the base rate. This has compounded the problems for the GBPEUR rate as investors have taken up stronger positions on the Euro. The US economy whilst growing is still incredibly weak and due to the amount of cheap loans issued to stimulate recovery cannot afford to go raising rates. They are still administering the latest round of Quantitative Easing and will need to fully assess the effects before committing to a rate hike.
- Economic Outlooks - The economic outlook for the Euro has improved this year with encouraging signs in manufacturing and factory orders. Unemployment is falling and the overall picture remains buoyant despite the problems of the PIGS. The UK is suffering from very low growth and the immediate future does not look rosy either. It could be months or a year before the economy is deemed strong enough to be able to handle a rate hike and even then if the Euro has already had one, it is unlikely to be a major mover.
And now a Question Arises to us When will the Euro weaken?
For this: The Euro has been under huge pressure recently as a result of the debt crisis. Despite this the Euro remains very strong as a currency which often has clients asking me when the Euro will weaken.
This is normally in relation to the GBP (Great Britain Pound) EUR rate. With the well publicized nature of the debt crisis this is a good question to be asking. After all this time last year the rate was in the 1.20's... We are now a year later and the debt crisis has only got worse.
Interest Rates – the currency is attractive to buy which keeps it strong. The higher a countries interest rate, the more investment it receives, and hence the stronger it grows. The raising of interest rates is a sign to the wider world that the Euro zone economy is expanding and can allow an interest rate hike. Looking specifically at the GBP EUR rate the sterling side is weak due to low interest rates. You only need to look at the weakness of the pound against most other currencies to understand why it is also weak against the Euro. The prospect of an interest rate hike is again being pushed into 2012 for the UK, and the Federal Reserve has said rates could be on hold until 2013! Can your currency transfer wait a year or even two in the hope things ‘might' improve?
Germany – When investors look to the Euro they look at the whole economy and not just individual nations. So the poor state of the PIIGS (Portugal, Ireland, Italy, Greece, Spain), whilst a major concern is not the whole story. Despite some worse than expected GDP figures coming out today for Germany, Germany has a very healthy economy with very strong exports. The long term expectations are that this will continue. Contrast this to the UK with a Manufacturing and Industrial sector in decline, and a financial sector tarred by the global financial crisis.
Economic and Political Will – There is a massive political and economic will behind the Euro. The backdrop to the current arrangement is a long bloody history and the original idea behind the economic union was to prevent the countries going to war again. To get to where we are today has taken decades of negotiation and consensus which I cannot see being undone quickly. Whilst coming under immense pressure for not acting decisively enough, the Euro zone leaders also have provided the financial back up to deal with the crisis. There are current questions over whether the bailout funds will manage Italy, hence the recent volatility, but the ECB (European Central Bank) have tools to dampen the volatility.
Eurobonds – Presently each Euro zone member issues bonds themselves. Bonds are used by governments to finance the day to day running of the country. By auctioning off debt on a promise to pay back in the future, investors provide credit and liquidity to keep the governments functioning. The idea of a Eurobond would be to consolidate the members borrowing, thereby reducing the amount of interest on bonds weaker nations have to pay because they are weak. Germany has said they will not back a Eurobond but only because they feel the indebted nations (PIIGS) don't have their house in order. It is foreseeable that Germany would back the Eurobonds if the PIIGS can show themselves to be able to benefit from the Eurobond scheme. I personally cannot see how the weaker nations can manage long term in the current state. I feel the Eurobond is one answer to Europe's problems and if announced down the line will further help the Euro.
Despite the huge uncertainty in the market the Euro remains strong. Europe is the UK's biggest trading partner and we have invested heavily in their debt. For better or for worse we are part of Europe. If you believe the Euro zone will collapse, or even hope that it will because you feel suddenly the GBPEUR rate will improve, I would advise caution. The collapse of the Euro zone or further major shocks will hurt the UK economy which is already under huge strain.
In my opinion getting the best rate is about setting realistic expectations over your time frame and being ready to pounce when things are favorable. Part of our service is to not only offer award winning exchange rates, but also keep clients informed and updated so that they have all the information to make informed decisions.
Here are the five main reasons why this is the case.
1. Internally, the euro zone is a terrible mess, with extreme imbalances of debt, trade and competitiveness, but in aggregate, it looks like a remarkably strong economy. The current account is broadly in balance, public debt and the ongoing deficit as a proportion of GDP remains well below that of the US, levels of household and private indebtedness are relatively low, and there's even a little growth, albeit fast disappearing.
2. China is attempting to diversify its foreign exchange reserves away from undue reliance on the dollar. The euro is the biggest and most obvious alternative.
3. Interest rates are higher than in the US and the UK, and there has been no quantitative easing of any significance to debauch the currency.
4. The dollar and sterling are justifiably weak. All problems are relative, and both the US and the UK still have big ones in terms of dealing with the aftermath of the financial crisis.
5. If the euro zone breaks up, forcing weaker members such as Greece to leave, you are left with a potentially much stronger core. The more "Germanic" the centre of gravity in the euro zone, the stronger the currency will be.
The question is whether this underlying narrative can survive the current crisis. Back in the early noughties, the euro slipped below parity with the dollar. This might happen again. Here's why. By common agreement, the euro will either breakup or it must move to some form of joint liability, fiscal union. At the moment, we appear set on the latter course. But the politics make it extraordinarily difficult to engineer. At best, it's going to happen incrementally and probably in a quite unsatisfactory manner. With Europe lurching from one crisis to the next, it's hard to believe there's going to be much in the way of economic growth.
In countering such sluggishness, the European Central Bank will eventually be forced to abandon present disciplines and engage in much easier monetary policies, including quantitative easing. In the meantime, the credit worthiness of the Franco-German core will be undermined by progressive acceptance of liability for the periphery's legacy and future debts.
If on the other hand, the single currency does come apart at the seams, then chaos will reign, and it will be hard to determine who owes what to whom. In such circumstances all parts of the currency would lose value, not just the detaching periphery.
Even if market conditions do change and we start to see a lot more volatility, it will be only last for a few weeks anyway because we have the Christmas and New Year holidays just around the corner, and the markets are always very quiet and impossible to trade at that time of the year.
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