GBP/EUR: Bailouts Continue To Dominate Rates?

With exchange rates in Europe having been dominated recently by the Eurozone’s woes, what can we expect next from GBP/EUR and the Eurozone in general?

It’s certainly true that the Euro’s value post-2008 has been dominated by the swinging pendulum of local crises across the single currency zone. Initially, because the UK was so exposed to the financial markets and US-led problems, the Euro dominated and reached levels as strong as €1.02 to the Pound, but more recently with Ireland, Greece and now Cyprus requiring funding from the Eurozone’s powerhouse economies to maintain their Euro membership, jitters have understandably sent the Euro lower, with sterling rising to peaks near €1.28 in July 2012.

Last summer was of course the height of the Greek sovereign debt crisis, with very real fears that Greece would leave the Eurozone and revert to its own currency. This chart shows the value of GBP/EUR during 2012, with clear Euro weakness at the height of uncertainty, and a recovery for the single currency towards the end of the year once the bailout was agreed and paid by the ‘troika’ of central European financial bodies.
GBP/EUR in 2012" width="488" height="333" align="middle">
Similarly in 2013 to date, the Pound fell significantly against the Euro (around 7% in the first 2 months) before the Cypriot debacle which weakened the rate back around 3c in March. Now that the bailout terms have been agreed (after much messy and public debate around a levy on ordinary Cypriot deposit holders) we might expect to see the pair move lower again.

For sterling and the Euro, much will now depend on 2 key factors. Firstly, whether the UK can avoid the prospect of a triple-dip recession; this is far from certain and opinion remains divided. The first reading of Q1 GDP is due in the last week of April, and will reveal whether Q1 showed a return to growth, or a second successive quarter of contraction, the latter leading to the worst kind of headlines for Chancellor George Osborne. Secondly, whether the Eurozone can maintain some kind of stability through the rest of 2013; this again is not a safe bet and given the structural economic problems involved in having one interest rate across so many different economies and bond markets, many commentators think it is a matter of time before some of the bigger Euro economies are in serious trouble.

So for the Pound and Euro, there is no clear direction for 2013 and markets remain reactive to developments across the continent, as central banks and governments attempt to navigate unpredictable economic times.