PureFX

Why The Euro Is Strong On The Foreign Exchange Market

Thu 2nd February 2012

If you’ve have been changing currencies for a long time, you can’t have failed to notice that sterling has lost 25.0% against the euro this past half decade. Back in February 2007 the GBPEUR exchange rate was 1.51, compared to a rate today (February 2012) of just 1.21. This makes no sense, especially given the debt crisis enveloping Europe.

Right now, Greece is just 3 days away from defaulting on its +€350bn debt, if it can’t sign a debt reduction deal with its bondholders and so secure a second EU bailout. Spain meanwhile has an unemployment rate nearing 25.0%, rising to more than 50.0% for people less than 30. In addition, in spite of the encouraging rise to power of economist Mario Monti, Italy has debts totalling more than €1tn.

So how come the pound hasn’t gained ground back, given this crisis?

The UK is struggling too

One reason sterling has not bounced back is that the UK is struggling with its own debts.

Compared to European politicians, Chancellor George Osborne has acted decisively, insisting again and again that eliminating the UK deficit is his highest priority. This has won him confidence among investors, and bought interest rates on UK government bonds to their lowest ever levels.

But in spite of this, investors can’t ignore the fact that Britain is hardly storming ahead. In Q4 2011 the UK contracted -0.2%, while unemployment climbed for the 4th month running to 8.4%. In addition, though the government remains on target to reduce the debt, it has repeatedly cut growth forecasts.

The Eurozone silver lining

In addition, in spite of its behemoth debt burden, Europe possesses assets that are attractive to investors.

For instance, German has positively raced back from recession since 2008, posting growth and job creation figures that have left both the UK and other industrialised nations in the dust. In addition, smaller North European and Scandinavian countries including Finland and the Netherlands have also performed well.

Furthermore, taken as a global economic power as a whole, Europe is comparable to both China and the US in stature in spite of its debts. The UK (and hence sterling) taken on its own is a comparative small fish. This is also contributing to investor confidence in Europe.

In short then, it seems sterling weakness against the euro (compared to 2007 at least) is here to stay.

The only things that might change this are either an outright collapse of the euro, or a sudden and remarkable pickup in British growth.

For specialist guidance regarding your foreign exchange transactions, get in touch at foreign exchange broker Pure FX. You can also call us on +44 (0) 1494 671800 or email enquiries@purefx.co.uk.