The Stirling Euro Yo Yo Effect

Published on 20/09/2010 in Your Spanish Home

Always interesting to hear good news coming from the UK and recent revised figures for gross domestic product (GDP) in the second quarter of the year were better for Britain and worse for the US,.

CurrencyBritain’s GDP grew by 1.2 percent instead of 1.1 percent originally estimated, while the pace of US expansion was slashed from 0.6 percent to 0.3 percent. Investors did not have the foggiest idea what to do about either figure. Britain’s better than expected number actually provoked a minor sell-off after the announcement. Investors saw the elevated GDP figure almost as an economic swansong.

Government austerity measures and the uncertainty of the coalition’s ability to tackle the problems are bound to slow things down – the only question is by how much. As for the weaker US performance, investors had already been primed to expect a downgrade. They were just relived it was not worse.

A different confusion of cause and effect recently allowed the Japanese yen to strengthen after an announcement that the Bank of Japan (BoJ) would increase its supply of cheap lending from ¥20 trillion to ¥30 trillion. For any other currency it would have been bad news.

For the yen it was great: if the authorities in Tokyo were scared, investors needed to stick up on the best safe-haven currency around… the yen. It strengthened by 2.7 percent against the euro and the pound in the following 36 hours. There is talk of the BoJ selling the yen in order to hold it down. However, without co-operation of other central banks (unlikely because they have no vested interest in a more competitive yen) such intervention would probably be effective only in the very shortest term. Another example of how the markets react to information in differing ways.

The foreign exchange market is flying. A recent favourite was the Swiss franc, simply as it was the only currency for which nobody had a bad word. It would be no surprise to see a repeat soon. Thankfully the English did manage to beat them in the Euro Qualifiers recently.

For the pound against the euro it has been a yo yo effect sometimes its up a moment later its down. With conflicting information being published by various bodies in the UK concerning the state of the housing market the impact will be very much the same in the coming weeks.

At some stage we will possibly start to see a negative impact upon the pound as its dependence upon the housing sector to maintain a strong pound will diminish. During the last couple of weeks the pound has ranged from 1.20ish to just under 1.23, lets see where the next couple of weeks takes us however it will be more likely to continue within the same range.

Written by: Moneycorp

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For more information about how Moneycorp can save you money when sending money abroad, please visit the dedicated Eye on Spain/ Moneycorp website.

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