Foreign Exchange: Pound Strengthens Against The Euro

The Pound continued to benefit from being outside the Euro-zone yesterday and strengthened against the Euro. In contrast it fell for a second day against the US Dollar, as market speculation escalates over the prospect of further quantitative easing from the Bank of England this week.

The Pound is benefiting from being considered as somewhat of a haven from the Euro-zone debt crisis and thereby rising against the Euro.

The Euro also declined heavily against the US Dollar, with rising concern that Greece will fail to reach an agreement on a debt restructuring deal, which would allow them to receive a second bailout and stave off the threat of a hard default.

In fact the Euro fell against 13 out of the 16 most actively traded currencies with potentially more losses to come before a resolution is found.

Whilst the preliminary fourth quarter growth figures showed the UK economy contracted in the final three months of the year, recent data has shown surprisingly strong growth in manufacturing and services sectors. This latter data may convince the majority of the MPC to adopt a wait and see approach before committing to additional quantitative easing.

The latest UK economic data was mixed with the Halifax house price index recording a 0.6% increase for January (albeit Nationwide reported house prices fell by 0.2% in the same period). A separate report from the British Retail Consortium reported that retail sales declined 0.3% in the year to January, following a 2.2% increase the previous month.

No doubt the debate surrounding the BoE interest rate announcement this week and the question of quantitatvie easing will continue today.

EUR/USD

The Euro struggled to stem the losses against the majors yesterday and fell to a low in the region of 1.3020 against the US Dollar by midday. The Greek discussions continued to dominate with officials already stating that the second financing package will now probably need to be at least €145 billion.

The IMF led troika has made it abundantly clear that Greece will need to make fresh austerity measures to reach an agreement and if they fail then there will be a high risk of default. The Euro regained some ground overnight, as the market became slightly more optimistic that an agreement will be reached.

There were no major US economic reports released during the day, although a speech from regional president Bullard did attract attention as he repeated his concerns over zero interest rate policy and opposed talk of further quantitative easing.

The Euro managed to rise back above 1.31 last night.

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