Factors which are causing Euro to be so strong against Sterling

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Kellypk

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The Euro is very strong at the moment (against Sterling).
One pound buys about 1.25 Euros

For the past 5 years, the average exchange rate between the currencies has been around 1.45 Euros.

I know there is no point in asking what's going to happen to the exchange rate between the 2 currencies in the short/medium/long term, because nobody knows. Any opinion would be just speculation, and probably as valuable as telling me who is going to win the 3.00pm at the Curragh.

I'm trying to understand what are the factors which have caused sterling to weaken so much against the Euro (13% reduction in a year).

Also what factors would cause it to go back to what it was i.e £1 = €1.45
 
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There are many reasons.

One short term reason is interest rates and the outlook for int rates.

The ECB have held rates at 4%, and it seems they will hold them there for maybe another 6 months to a year.

Whereas the BoE have cut rates from 5.75% to 5%, and may cut further.

So investors sell stg, as the yield from holding stg is falling relative to the euro.
 
Protocol said:
There are many reasons.

One short term reason is interest rates and the outlook for int rates.

The ECB have held rates at 4%, and it seems they will hold them there for maybe another 6 months to a year.

Whereas the BoE have cut rates from 5.75% to 5%, and may cut further.

So investors sell stg, as the yield from holding stg is falling relative to the euro.
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Good answer Protocol, it concurs with what I've read today by Googling the subject.

I was surprised to read that interest rates could effect the exchange rate so much, but then again, I'm not an economist, although I did study economics before.

Obviously UK goods are very cheap now to people in the Eurozone. (13% cheaper than last year).
Surely this will cause inflationary pressure in the UK, as Eurozone buys goods and commodities from the UK, at lower prices than before ?

I await with interest to see what's going to happen to the exchange rate in the medium/long term.

Any views on where the exchange rate will go in the medium/long term ?
 
It all started with the Northern Rock. The strength of a small currency like sterling is heavily dependent on confidence in the integrity of its management. When the BoE is forced to underwrite reckless lending for house purchase, that confidence evaporates.

I disagree with earlier posts in that sterling should be "naturally" lower still but is being proppoed up by higher interest rates than in any of the major economies.

All consensus is that it is going to get worse. My prediction is parity within the next few years at which time it might conveniently euthanase and Brits will belatedly join the Euro.
 
Yes, int rates and changing int rates are a factor that affect FX rates in the short-term.

Yes, with a weaker stg, imports into the UK will be more expensive, so UK may have higher import cost inflation.

We should have lower import cost inflation, due to our stronger currency.

A longer term factor affecting fx rates is the balance of payments situation in each country, whether it is in surplus or deficit. A large and sustained deficit may lead to a generally weaker currency.

The US and UK are both in deficit. So it in the long run, this will not help their currencies.
 
Harchibald said:
It all started with the Northern Rock. The strength of a small currency like sterling is heavily dependent on confidence in the integrity of its management.
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Just looking at the historical rates on oanda.com, it's true, the slippery slope began with the Northern Rock crisis on the 12/Sept/2007. Looks like it is levelling of now though (at least in the short term)

Harchibald said:
All consensus is that it is going to get worse. My prediction is parity within the next few years at which time it might conveniently euthanase and Brits will belatedly join the Euro.
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Surely not all Consensus? Any citation on this (I sound like wikipedia !), did any important well respected economist say this ?

Would it be in the UK's interest to join the Euro with a strong Sterling or a weak sterling ?
Obviously a weak sterling is great for UK exports.
Do the bank of England have any policy about where they would like the exchange rate to be, or are they happy to leave it to the markets ?
 
Ireland:
Interest rates are deemed unlikely to dip any time soon given inflation concerns and relatively healthy news coming form the likes of Germany etc.

UK:
Despite inflation concerns, Interest rates are expected to come down more towards the end of the year with relatively poor figures coming from the UK economy.

Prospects for sterling arent too healthy in the next quarter to end of year
 
Its got to do with interest rates but also with british economy and its exposure to the credit crunch and the falling housing market there, the international opinion is that britain with its big financial sector is very exposed to the current credit crunch, george soros has said that britain is even more exposed than US, Germany being such a huge economy within the eurozone is masking credit crunch problems in other european countries (notably ireland and spain)
 
I've just found this thread which is prescient given events of the past month and the steep fall in the value of Sterling relative to Euro (but not to the Dollar - how does that work?)

On the global level does this mean Irish imports from EU and USA (except UK) cost more? Does it not also mean that the death-knell of the leisure and tourist industry as Americans and British will be unable to afford Ireland for the next couple of years? Does it indicate that wealth will flow out as Irish spend in the UK and USA (evidenced by a rash of posts on AAM where posters are taking advantage of the shifting balance and buying cars and major purchases in UK)?

To Protocol's point about high indebtedness in the UK I seem to remember that Ireland was much higher in the international league of personal debt.

As far as state expenditure is concerned, from recent investigative journalism there is a distinct impression that the Irish coffers are empty and will not easily be refilled. The UK national debt is high but its financial sector remains immensely powerful at the moment with even the Chinese economy slowing rapidly, and it continues to have a prime and much-desired export.......expertise and knowledge-systems.

Last but not least, the 'crunch/crash' began in the UK three years ago and professional financial opinion is that it has or will very shortly 'bottom out'. When I began to panic recently and think about selling sterling I was advised by canny, wealthy ex-stockbroker friends who continue to be involved with financial products that 'despite appearances' the UK economy would not - ultimately - take the same beating as Euroland which is currently 'held together by sheer German determination'.

As a lay-woman I don't know what to think......... However as the weight of woes such as the most recent dioxin scare pile on top of each other perhaps sterling is not so 'doomed' or the Euro so safe?

Any views?
 
Marie said:
I've just found this thread which is prescient given events of the past month and the steep fall in the value of Sterling relative to Euro (but not to the Dollar - how does that work?)
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The theory is that loans that were given out in dollars are being repaid as part of the deleveraging that is going on. That means that there is a lot of demand for dollars at the moment, capital is flowing in and this is strengthening the dollar. Sterling has no such advantage, as much of the movement is out of sterling (from London hedge funds and financial companies) into the dollar. So the theory goes, anyway!

On the global level does this mean Irish imports from EU and USA (except UK) cost more? Does it not also mean that the death-knell of the leisure and tourist industry as Americans and British will be unable to afford Ireland for the next couple of years? Does it indicate that wealth will flow out as Irish spend in the UK and USA (evidenced by a rash of posts on AAM where posters are taking advantage of the shifting balance and buying cars and major purchases in UK)?
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Yes. Yes (death-knell may be overstating it, but times are going to be very tough). Yes.

To Protocol's point about high indebtedness in the UK I seem to remember that Ireland was much higher in the international league of personal debt.
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But Ireland is not the eurozone. It's not even very much of the eurozone. Many of our partners are more sensible than us, in particular the Germans.

As far as state expenditure is concerned, from recent investigative journalism there is a distinct impression that the Irish coffers are empty and will not easily be refilled. The UK national debt is high but its financial sector remains immensely powerful at the moment with even the Chinese economy slowing rapidly, and it continues to have a prime and much-desired export.......expertise and knowledge-systems.
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Financial sectors make lots of money when asset values increase. Asset values are crashing...

Last but not least, the 'crunch/crash' began in the UK three years ago and professional financial opinion is that it has or will very shortly 'bottom out'. When I began to panic recently and think about selling sterling I was advised by canny, wealthy ex-stockbroker friends who continue to be involved with financial products that 'despite appearances' the UK economy would not - ultimately - take the same beating as Euroland which is currently 'held together by sheer German determination'.
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Well, about a year and a bit ago in the UK - think Northern Rock. It started earlier in the US with declining house prices, but not that much. The insiders have been convinced about many things, many of them wrong. Maybe they are right, but I don't see how the UK can get out of recession without a significant revaluation of sterling (which is currently taking place). Personally, I think the euro is stronger than just Germany, but they are undoubtedly the strongest bit of it. Which strong bit of Britain is determined to keep sterling together?

As a lay-woman I don't know what to think......... However as the weight of woes such as the most recent dioxin scare pile on top of each other perhaps sterling is not so 'doomed' or the Euro so safe?

Any views?
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The dioxin scare has zero impact on the euro. Absolutely none. It is a problem in part of the agricultural sector in a small economy on the edge of europe.
 
yoganmahew said:
But Ireland is not the eurozone. It's not even very much of the eurozone. Many of our partners are more sensible than us, in particular the Germans.
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The UK is heading into a serious downturn and some would argue that it will be a deeper recession than the Eurozone.
In recent days, the Germans have slapped the wrists of G Brown and A Darling for their blinding belief in a Keynsian response to the issue in the UK.
I think the UK government have commited to spending $1 trillion thru to 2012 and most of this will be borrowed. The more they borrow, the more sterling will slide. The more sterling slides, the more expensive their interest repayments become. They are saddling their economy and their population with huge debt which will take a long time to repay. Of course, we must realise that we in Ireland are also in the glasshouse and can't throw stones.

Parity may come alot earlier than people are suggesting ... we may even see threads next year of how far past parity the euro will go!!

None of this is good for our exporters .... while its boom time for Newry.
 
That's interesting. The media are certainly lambasting Gordon Brown and there is criticism of management of the UK economy BUT when you look beyond that every decision Brown has made - from bailing Northern Rock which offended the taxpayer's sensibilities, to the latest commitment to a 'fiscal stimulus' were subsequently emulated by the European and American banks...........unfortunately, a tad too late in the instance of US car manufacturing.

Do other socio-economic factors - like unemployment levels - figure in how the relative strengths of the major currencies pans out over the next year or so? One of the current strengths of the UK economy is very low unemployment levels, several major casualties in the past week, including Woolworths, notwithstanding.
 
Marie said:
Do other socio-economic factors - like unemployment levels - figure in how the relative strengths of the major currencies pans out over the next year or so? One of the current strengths of the UK economy is very low unemployment levels, several major casualties in the past week, including Woolworths, notwithstanding.
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It is predicted that unemployment in the UK is near to 5 million which includes disability and others on courses, it is also predicted that unemployment will increase a lot in the first 3 months of the new year.

Joody
 
But still less than Eurozone. Can sterling really move out of the major currency league? Is parity the only necessity for the UK government to switch to Euro? What happens to the Stock Exchange and could it be privatised?
 
You will also find that quite a lot of 'speculators' are shorting sterling, causing its value to dip artificially. Those that short have to buy back that which they have shorted at some point.

The same speculators that drove the oil price up into the heavens are now playing their part shorting anything that can make them a 'quick' buck..sterling included.
 
smiley said:
You will also find that quite a lot of 'speculators' are shorting sterling, causing its value to dip artificially.
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Would you care to explain to the layman how shorting a currency causes it's value to fall?
 
Duke of Marmalade said:
Shorting is fancy speak for selling.
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So all smiley's comment basically means is that there are traders out there selling Sterling? This sounds more like a symptom of a weak currency than a cause. I doubt they would be selling it if they thought it would be going up.
 
Duke of Marmalade said:
Shorting is fancy speak for selling.
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Well, fancy speak for selling something you don't have, at a future point in time, when you hope to be able to buy it for less.

So I sell you an apartment off-plan for 200k (it's current price today) with a delivery date of next June. When the apartment is built, I buy it from the developer for 160k, as negative fundamentals have pushed it's price down, and I've made myself 40k.

Something like that, anyway :)
 
yoganmahew said:
Well, fancy speak for selling something you don't have, at a future point in time, when you hope to be able to buy it for less.

So I sell you an apartment off-plan for 200k (it's current price today) with a delivery date of next June. When the apartment is built, I buy it from the developer for 160k, as negative fundamentals have pushed it's price down, and I've made myself 40k.

Something like that, anyway :)
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Cheers yoganmahew, that's a nice easy to understand explanation of shortselling.

Taking the same analogy though, I'm still not sure why selling the apartment for 200k would cause it to drop in value. I'm sure smiley probably has the answer to that one.
 
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