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GBP/EUR up to 1.20 but is it fundementals that have taken it there?

GBP/EUR up to 1.20 but is it fundementals that have taken it there?

It may have been the long wait over the bank holiday weekend that caused such strong volatility yesterday, but for the Pound at least the day was coloured more by the rumours, since confirmed, of the collapse of Prudential’s bid to buy the Asian arm of AIG. The day started well for the Pound with manufacturing PMI figures coming in around expectations keeping the survey up near 15 year highs, although this did give the Pound some support, it failed to give it any impetus to make gains. It wasn’t until around lunch time that the Pound really started to move, breaking through 1.20 against the Euro, and 1.46 against the Dollar. The strong rally is being put down to the collapse of the Prudential deal for AIA, previously when the buyout was announced the Pound had fallen significantly with the rumours circulating that Prudential had actually already bought a large amount of the Dollars needed to purchase the Asian company, and the sharp unravelling of those trades is being credited with the Pounds sudden move upwards yesterday. Although many forecasts did see the Pound rising through the year, yesterday’s moves have taken it to levels many thought we wouldn’t see until towards the end of the year, it may be that the large amount of currency moving through the markets has distorted the price somewhat and it may fall back to a more orderly pace, however the Pound has continued to edge upwards, albeit much more sedately and currently sits around 1.20, and 1.47 against the Euro and the Dollar respectively.

The Pound may have been the best performer on the markets yesterday, but it wasn’t the only currency to experience heightened volatility. The Euro also moved heavily, although in this case it  was down, falling not just against the surging Pound, but also dipping against the Dollar, falling to almost 1.21. The ECB’s warning of further losses for European banks highlighted the problems for the European finance sector as they try to respond to the sovereign debt issue, and at a time when the Eurozone needs political stability, the resignation of the German President has added an extra layer of worries onto the Euro. It’s hard to see what will stop the Euro’s slide, yesterday’s manufacturing figure certainly weren’t good enough to make a difference, showing a slight dip from the previous month, and it might take a good few months of stability before the markets become more sure of the Eurozone’s future, and the single currency is going to struggle until that happens.

We’ve had mortgage lending data out today for the UK, which have shown a rise in the number of approvals, but a fall in the amount of lending across the economy, not something the BoE nor the government will be pleased to see, however it has had little effect on the Pound. It is unlikely that yesterday was enough time for Prudential to close out all their currency exposure for the collapsed buyout deal, so their is potential for the Pound to move a little further upwards, although for now it looks to be holding on around current levels.

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