Yesterday Saw Single Biggest Gain by the Pound Against the Euro for Over a Month

The pound obtained a major boost yesterday after the publication of much better than expected UK gross domestic product (GDP).

The Office for National Statistics (ONS) reported that in the three months to September, UK GDP rose by a full 1%, the strongest reading since late 2007. It also means that the UK economy exited from its double-dip recession. Analysts had expected a positive figure and the consensus expectation was for a positive figure of 0.6% with some economists anticipating a rate of expansion of as low as 0.4%.

The ONS also reported that "it is not possible to quantify the overall impact of the Olympics and indeed some of the activity may have displaced other activity (for example, the comments on watching the Olympics in preference to films or DVDs)."

Speaking immediately after the data release, ex-deputy Bank of England (BoE) Governor John Gieves remarked that today's data could slightly tilt the BoE away from further stimulus at its November meeting, or lead it to stall on this front for one or two months. It may also help to safeguard the UK@s prized AAA credit rating in the markets which has come under scrutiny of late.

Sentiment continued to be negative on the euro after a raft of poor economic data out this week despite the news from Lisbon that the International Monetary Fund (IMF) has completed its fifth review of Portugal’s progress and approved the release of the next tranche of funds, €1.5 billion of aid that forms part of the total €78 billion bail-out package approved last year.

The IMF considers that Lisbon has made “significant progress” on structural reforms but expressed concern that austerity measures were hampering growth.

“A weaker external outlook and rising unemployment have increased risks to the attainment of programme’s objectives. Additional efforts are necessary, with the support of euro area partners, to further advance fiscal consolidation and boost long-term growth,” said IMF Deputy Managing Director and acting chair Nemat Shafik.

Money Transfers to the euro zone:-

As recently as Tuesday, 23 October, the pound was trading at its lowest level against the euro for over five months. The better than expected data out of the UK yesterday combined with some woeful data out of the euro zone has resulted in a sharp reversal of fortunes. Yesterday saw the single biggest gain by the pound against the euro for over a month.

It is however far too early to even suggest that the UK economy has turned the corner and many challenges lie ahead. It is also worth noting that we are less than one week away from the start of a new month where the focus of attention will always be cantered on the monthly Bank of England Monetary Policy Committee meeting, next due on 8 November. Inevitably, there will speculation that the Bank may proceed with its money printing program, known as Quantitative Easing (QE) to try and further stimulate economic activity in the UK post Olympics. The downside of QE from the foreign exchange market’s point of view is that by increasing the money supply in the country, it devalues the pound.

Clients with a euro requirement (maybe to get in some winter sunshine in Portugal, Spain, Italy or Greece) may wish to consider securing a rate at the current level in case we see another reversal of fortunes back down to the over five month levels seen all of three days ago.