HiFX comment on the pressure facing the Euro
Chris Towner, managing director of FX advisory services at foreign currency specialists, HiFX said: “The euro is under pressure in the FX markets and the lower it falls, the greater the fear becomes that this currency has a lot further to fall. Europe is facing some pretty large economic issues – namely slowing growth and prices – which are very hard for the central bank to control.
“The European Central Bank (ECB) has already cut rates as far as it possibly can and yet inflation lingers at 20% of its 2% target level. A strong exchange rate puts downward pressure on domestic prices, and even though the ECB does not target the exchange rate specifically, it has certainly talked about it a lot over the last few months, making it very clear that it would like the euro weaker.
“Since the credit crisis in 2007/2008 which led to devaluation in sterling, we have seen GBP/EUR deal between 1.02 and 1.30, which has become the new norm. However, previous to this, GBP/EUR spent five years dealing between 1.38 and 1.53 between 2003 and the latter stages of 2007.
“With the ECB pushing for a weaker euro in order to stimulate inflation, large companies are becoming increasingly concerned about the outlook for the euro and are discussing whether they should be hedging euro held assets on their sterling balance sheets. To begin with, this results in a trickle; however the weaker the euro goes, the more companies and people look to protect themselves, which results in some pretty volatile moves in the FX markets. If GBP/EUR starts to break through 1.2860 and then the psychological 1.30 level, the fear could increase and we could see the euro weaken further. After all, the average of GBP/EUR since the inception of the euro at the beginning of 1999 is 1.3750. This seems a long way away currently, but the momentum is building in this direction.”
