Euro Exchange Rate Forecast: GBP/EUR Set To Spiral On New Debt Deal?

Modified: Monday, 15 April 2013 09:01 BST - Written by Minesh Chaudhari

STORY LINK Euro Exchange Rate Forecast: GBP/EUR Set To Spiral On New Debt Deal?

News from the eurozone during the weekend market shutdown has ensured that the euro starts the week firmly on the back foot. All was quiet on the European sovereign debt crisis front until the recent Italian elections brought an indecisive result, leasing institutional investors to fear that the Mediterranean state was set to ditch its austerity plan. And then came Cyprus. The announcement fro EU officials late on Friday that both Portugal and Ireland will be granted an extra seven years to pay back their respective emergency loans has fanned the flames of the euro area’s debt crisis. The Pound Euro exchange rate (currency GBP/EUR) has broken back above the 1.1700 level in early trading today as a consequence.

If nothing else, the announcement shows a flagrant lack of consistency from the region’s policymakers. Cyprus’s bailout of last month contained draconian measures which effectively punished the island state by shutting down its lucrative offshore banking sector. For Ireland and Portugal to be given such leeway regarding the terms of their emergency funding just a few weeks later will be viewed with interest in Nicosia. At the very least, the announcement is likely to trigger severe tensions between the euroland’s seventeen nation states. Previously any political schism between the seventeen has been between the wealthier Northern states, led by Germany, and their Southern cousins, who Germans like to brand ‘profligate’. If the weekend announcement elicits any scent of a new division between the Southern peripheral states, then market participants may move against the single currency.

Elsewhere, not for the first time, last night’s data from China looks likely to have a pronounced effect on price action in the currency markets today. Chinese Q1 GDP data, published during last night’s Asian session, revealed a surprise drop from Q4 2012’s annualised showing of 7.8% down to 7.7%. Analysts had been anticipating a print of 8.0%. The release has already triggered a sell off in Asia’s share markets, with Hong Kong’s Hang Seng giving up over 1.5% of its value. The development is likely to hit the risk-sensitive Australian and New Zealand Dollars and the commodity-dependent Canadian Dollar hard, sending GBP AUD, GBP NZD and GBP CAD higher today.

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