Pound foreign exchange rate stalls: fears of Greek contagion take hold

May 23, 2012 | By | 1 Reply More

Exchange Rate; For latest rates click here

By Peter Lavelle

23.05.2012

Here is my latest update of the UK pound to euro currency exchange rate, covering the 16th to 23th May 2012. This is intended as a brief guide to what’s affected the currency exchange rate this past week as well as what might happen next, to help you decide if now’s the best time for you to change currencies.

This past week:

1. The pound foreign exchange rate fell from its recent high against the euro this week, as concerns about possible contagion from a Greek euro exit hit the UK.

Estimates put the cost of Greece re-adopting the drachma at €1tn, given that, aside from Greece defaulting on its own debts, its leaving might prompt a domino effect across Europe as indebted banks lose faith in each other. This would replay the collapse of Lehman Brothers in 2008 and heavily effect UK banks, in spite of their lack of direct exposure to Greece.

2. In spite of this though, the pound avoided further losses against the euro, and in fact held its ground against the Australian and New Zealand dollars, on encouraging reports from the UK.

exchange rate

Christine Lagarde gave a joint press conference with George Osborne

IMF director Christian Lagarde praised the UK this week*, saying that its fiscal consolidation plan was entirely the right course of action, and that already the UK had made good progress. This of course compares to Europe, which seems to inch closer to depression on a daily basis. In addition, the UK government got off to a good start to the fiscal year last month, as public borrowing came in a huge -£25.0bn beneath forecasts. This data could support the pound foreign exchange rate at its current levels.

3. Turning to the US meanwhile, the USD emerged as the big winner from concerns about Greece, gaining against both the pound and euro this week.

This is because the US remains the backbone of the global economy, and a safe haven in tough times. This is in spite of increasing uncertainty about the US’s own prospects, as America’s debt reaches epic proportions. Politicians are due to negotiate extending Bush-era tax cuts in just a few months, and if agreement cannot be reached, it could replicate the debt ceiling debacle of last year, in which Congress came close to pushing the US to default. This of course is unlikely to help global confidence, which could in fact aid the USD foreign exchange rate, in spite of the fact that it’s America’s problem.

4.  Looking ahead, the future of the euro depends on Greece’s election in a month, as well as a crucial EU summit this afternoon.

We won’t know if Greece is set to remain in the euro until June 17th, when it holds its second general election. In the meantime though, the response of European politicians given the possibility of a Greek exit will be crucial in shaping euro strength. This afternoon for instance, European Union heads of state are set to discuss new ways of ending the debt crisis, including introducing Eurozone bonds (so that debt is issued as a group) as well as fiscal stimulus. Of course, neither of these proposals enjoys German support, meaning they look set to crash and burn, at least until the crisis escalates. That could keep the euro foreign exchange rate down.

I will of course return with my next update next week.

If you have any questions about changing currencies or transferring money abroad in the meantime, don’t hesitate to get in touch at foreign exchange specialist Pure FX. We’d be delighted to provide an in-depth personal answer to your enquiry, free of charge.

For my previous commentary on exchange rates click here

*Click here for further details of Christine Lagarde’s press conference with George Osborne

 

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