GBP viewed as European Safe Haven
Fear is gripping global financial markets this morning with one trader summing up the chaos as a ‘US versus Europe ugly contest’. In one corner you have the US with political squabbling, spending cuts and very poor economic readings and in the other you have Europe with slowing growth, high debt levels and disjointed political leadership that has added to investor woes.
A few weeks back EU leaders announced how they were going to tackle the European debt crisis, only for it to take up to four months to ratify the agreement while they all went on holiday!
What has been the result of this inaction? Well, all major European stock markets plummeted yesterday, Spanish and Italian borrowing costs hit record highs of 6.43% and 6.22% respectively and there were ominous signs that European money markets were seizing up– tracking the pattern seen prior to the financial crisis in 2008. Remember one of the main problems during the last crisis was that financial institutions couldn’t borrow money, so banks like Northern Rock had to ask the Bank of England for funds – triggering its downfall.
While the UK can’t avoid the market turbulence, it is worth noting that UK borrowing costs fell yesterday to their lowest rate since 1946. How has this happened? Well despite pretty poor economic news of late, the markets views the UK as a relatively safe bet in times of uncertainty, as we are ahead of many Western economies in reigning in our debt levels.
In a further positive sign for the UK economy, the services PMI released this morning showed the index rose to 55.4 in July from 53.9 in June. This confounded expectations of a slowdown and means the service sector is growing at its fastest pace in four months.
This news buoyed Sterling with GBP/USD trading up a little over 0.5% at 1.6372 and the pound making back most of its overnight losses against the Euro to trade at 1.1464.
What does this all mean for me? Well buying your EUR, USD, AUD or any other currency at the wrong time could cost you a fortune. There is no crystal ball but Currency UK can give you the information you need to make an informed decision.