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Why sterling is so weak versus the euro


Many will be tempted to blame sterling’s weakness against the euro as entirely a result of uncertainty surrounding the UK economy created by the Brexit vote.

And, while that is true to an extent, it is not the only reason why the pound has fallen to an eight year low against the euro.
The bigger picture is that the euro is strong against pretty well every major currency at present.
The euro has been the best performer this year in the so-called G10, the grouping of the world’s 10 most heavily traded currencies, which apart from sterling and the euro also includes the US dollar, the Japanese yen, the Canadian dollar, the Swiss franc, the Australian dollar, the Norwegian krona, the New Zealand dollar and the Swedish krona.

Image: European Central Bank president Mario Draghi
While the euro has risen by just under 8% against the pound so far this year, against the US dollar, the single currency is up by almost 12% in that time.
It is up by nearly 13% against the Hong Kong dollar so far this year. And, most strikingly of all, it is up by more than 6% so far this year against the Swiss franc, the globe’s strongest-performing currency since the financial crisis.
So it isn’t just a case of sterling weakness – it is also that the euro is presently turbo-charged. Most of those gains have come during the last three months.
The reason for this strength is that the eurozone has performed unexpectedly strongly since the beginning of the year.
Not just Germany, which led the bloc’s recovery from its post-crisis slump, but previous laggards such as Spain, which is expected to grow by 3% this year and even Italy, which has suffered a triple-dip recession during the last decade.
The Netherlands, another economy that suffered a sharp slowdown and a traumatic house price crash following the crisis, was revealed a few days ago to be growing at its fastest rate since European Monetary Union got underway 17 years ago.
Even Greece, the poster child for everything that could possibly go wrong in the eurozone, is growing and has seen a significant drop in unemployment during the last 18 months.
The latest positive news, fuelling today’s upward surge, was the closely-watched Purchasing Managers’ Index – a survey of economic activity – for the euro area.

With anything above 50 signifying growth and anything below that a contraction, today’s number for August was 55.8, up from 55.7 in July and better than economists had been expecting.
Along with previously published data, it suggests the economy should grow by a further 0.5% during the July-September quarter, with individual elements of the survey data especially encouraging.
Manufacturing activity in the eurozone, for example, is currently growing at its fastest since April 2011 and export orders at their fastest since February that year.
Greg Fuzesi, eurozone economist at investment bank JP Morgan, said: “Hard activity can be very noisy over the summer period. But the underlying momentum in the economy certainly still looks very good.”
This robust growth has led to speculation that the European Central Bank might wind down the stimulus programme it launched five years ago more rapidly than expected.
Since 2015, the ECB has bought more than €1tn-worth of assets – quantitative easing in the jargon – and is committed to further monthly purchases of €60bn until the end of the year.
In a speech in June, the ECB president, Mario Draghi, hinted the asset purchase scheme might wind down early and this is what has fuelled a lot of the recent strength in the euro.
Mr Draghi is set to give another key note speech this weekend at the Jackson Hole economic symposium in Wyoming and speculation that he may give more indications along these lines has also helped drive the euro higher in recent days.
Ironically, though, this recent strength in the euro could also prove unhelpful for major exporters like Germany.
Minutes from the latest ECB policy-setting meeting, last month, revealed that some at the bank are already unnerved at the euro’s recent strength.
That may deter them from unwinding the bank’s asset purchases or raising interest rates – its main policy rate was cut to zero in March last year – any time soon.

Source: Sky

About Business Ideas UK

My name is Joel Bissitt. I have been an entrepreneur for 24 years and have run many small businesses across various sectors. For the last 10 years I have worked mainly within online media, franchising and small business start-ups. I am an author of various websites including Franchise UK https://www.franchise-uk.co.uk

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