GBP/EUR The Currency Pair to Watch for in 2014?
Currencies / British Pound Jan 12, 2014 - 06:03 AM GMTBy: Submissions
Liron Levy writes: It is crystal clear that employment is the economic sector that appears to drive the currency exchange market. No country or economic zone is today boasting that they are out of the woods as to the 2008 global recession. However, the GBP is benefiting from current figures that continue to confirm a strong ongoing improvement in the employment sector. The jobs picture in the UK exhibits falling unemployment, along with a seventh consecutive month of healthy increases in hiring.
The primary sectors covered in Markit’s Purchasing Managers Index (PMI) are comprised of employment, manufacturing, construction and services. In the UK, manufacturing output registered a slightly larger drop than predicted. The third quarter 2013 Manufacturing PMI recorded 58.1, the peak since 2010. That score dropped to 57.3 for the fourth quarter. The sunnier side of the British manufacturing photo, however, shows new orders reaching a 21-year high, coupled with a rise in new jobs that tops the charts when reviewing the past 2.5 years.
The GBP and the EUR
Bolstering the forex investment in the upward movement of GBP/EUR, is the intimation by the Bank of England (BoE) that once the ongoing drop in unemployment brings that indicator to a threshold of 7.0%, the global community can expect to see a rise in rates.
Viewing the Construction section of the PMI, we see a sector that has come out stronger in the fourth quarter than was previously forecast. The expectation was a drop to 62.0 from the third quarter 62.2. The reality was a midpoint level of 62.1 by the year’s end.
As is often the case, the PMI presented a three-dimensional configuration of the financial outlook for the U.K. A huge portion, 70% in fact, of the GDP of Britain is ensconced in the service sector. The fourth quarter brought this major sector to 58.8, the lowest reading since July 2013. At least 60.0 was expected. In spite of the surprising dip in the service sector, the elevated level of the GBP has continued unabated, as investors look to the solid 5.3% improvement in the GBP over the entirety of 2013.
Inflationary Fears Put the Skids On
The picture of the British monetary framework must include a look at inflation. The rise in the wage structure is not keeping pace with inflation, though individual spending remains alive and well. The strength of the Gross Domestic Product is dependent upon the inclination to spend. Economists who are optimistic as to the sustained economic revival of the U.K., expect an increase in wages to result from a corporate growth-oriented outlook.
Gaining a perspective as to the economic situation of continental Europe, the pervading view is one of a monetary zone that continues to struggle. The price-rise indicator of financial health was a dismal one-month drop from 0.9% to 0.7%. Deflation, translated as a decrease in overall retail prices, is avoided like the plague by each country. Accompanying this drop from November to the close of December is a rise in the regional debt of Europe. The result of this duality is a statement by the European Central Bank that interest rates, currently at their lowest record of 0.25%, may drop even lower.
It is the establishment of new jobs, chasing a seven-year high, that ultimately carries the day, as the GBP/EUR currently continues to register over 1.20. Additionally, the prediction of a higher rate by the BoE as unemployment falls, coupled with the negative data emanating from Europe, create a solid GBP/EUR performance. It’s looking solid for the sterling, and forecasts certainly point in that direction.
This article was contributed by www.cfd.co.uk
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Copyright © 2014 Liron Levy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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