The common currency gets back its swagger! The euro climbed to 0.8333 against the pound recently, its highest since January 17th.
Euro climbs, as Eurozone economy revives, UK cools
The euro has strengthened against the pound, chiefly because the Eurozone economy seemingly bounced back at the start of 2014. Output in the currency bloc climbed at its fastest pace since June 2011 in January. Moreover, economists such as James Ashley at RBC think that “the recovery for the economy as a whole will continue” for the Eurozone. So, this boosted the euro!
At the same time, sterling lost its legs a little in January, as the UK economy showed signs of cooling. The UK’s all-important services sector grew at its slowest pace in 7 months last month, while UK manufacturing also decelerated. This isn’t to say the UK will fall back into recession, because these sectors are still growing, they’re just doing so more slowly. So that weakened the pound!
Outlook unclear, as both BoE and ECB to prove cautious
Looking ahead, it’s not clear whether the euro will rise further against the pound. This is because both the Bank of England and European Central Bank will likely prove “dovish” this week, meaning they’ll talk down both their economies and the chance of an interest rate rise.
In all likelihood, the Bank of England will reiterate today that there’s “some way to run” before it raises interest rates, in spite of the perky UK economy. Why? Because although the UK economy has done swimmingly in the past 6 months, the recovery is by no means secure. Given that lower UK interest rates make UK assets less attractive to investors, this will cut demand for the pound.
At the same time, the European Central Bank may cut interest rates to just 0.1% this week. This is because prices in the Eurozone have fallen below 1.0% for 4 months now, raising the threat of a “deflation ogre,” as the IMF’s Christine Lagarde calls it. Deflation is what caused Japan’s economic stagnation in the 1990s, so the ECB may cut interest rates to fight it, even if that hurts the euro.
So, the euro has climbed against the pound, but may struggle to rise further!