Foreign Exchange Rates - GBP/EUR Rate Plummets on Relative Interest Rate Expectations and Rumours of a UK Debt Downgrade

March 25, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Rates - GBP/EUR Rate Plummets on Relative Interest Rate Expectations and Rumours of a UK Debt Downgrade

The Pound Euro exchange rate (GBP/EUR) is 1.1352. The Euro Dollar exchange rate (EUR/USD) is 1.4159.

The Euro experienced an unusual trading session on the day yesterday. With a slew of apparently negative data and information emerging regarding the single economic area, the Euro should have been showing red across the board. However, the reverse was true.

Sovereign debt problems continued to dog the Portuguese economy following the failure of its ruling party to gain a consensus for further austerity measures late on Thursday. The voting down of the fiscal proposals caused the Portuguese Prime Minister to resign and prompted leading ratings agency Fitch’s to downgrade Portuguese debt from A+ to A-.

New Eurozone debt fears surfaced later on yesterday, this time in the retail banking sector, when Moody’s downgraded their assessment of the credit worthiness of 30 Spanish banks. The final Irish Q4 GDP figure provided further cause for concern regarding the real Eurozone economy, when it was released yesterday. Analysts had expected that the figure would show growth of around 0.6%, instead the final figure came out at -1.6%, showing that Irish austerity measures are hitting home.

Given these events, it was a big surprise that the Euro made major gains against both the Pound and the US Dollar. GBP/EUR plummeted from a high of 1.1542 to touch 1.1352. These losses were partly caused by a continued belief that the ECB will raise rates next week, while expectations of a UK rate rise ebb away. Sterling weakness following poor February Retail Sales figures and a warning from Moody’s that low growth rates could cause a UK debt downgrade, also contributed to the downward move in GBP/EUR. Meanwhile, EUR/USD also rallied throughout yesterday to approach its near-term high of 1.4248. Further Euro strength could lead to a key breakout above this level.

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