The Pound to Euro Exchange Rate improved to a daily high of 1.198 yesterday immediately after the Bank of England announced an increase in quantitative easing from £275 billion to £325 billion. The £50 billion rather than £75 billion increment was widely met with relief from markets, who had already priced the decision into their outlook. Following a contraction of -0.2% in the fourth quarter of 2011 the MPC’s decision was expected and accepted – although it could prove to weigh down on Sterling in the mid-term as a result of currency devaluation/dilution.
The BoE’s Monetary Policy Committee also announced that the benchmark interest rate will remain at a very low 0.5%. The ECB followed suit and maintained their own slightly higher, but still low, interest rate of 1.0%. The Pound to Euro Exchange Rate experienced extreme volatility yesterday as many different currency forecasts followed through on expectations. After the Pound’s initial gains, the effect of QE combined with a purported resolution to the Greek debt talks forced the Pound to lose value against the Euro, reaching a daily low of 1.189.
But the rose-tinted reports of resolution in the negotiations proved naive, as Greece’s creditors and the Eurogroup deemed the proposal insufficient; they demanded evidence that Greece will implement the painful austerity measures detailed in the talks. In short; they do not trust Greece.
They have good reason to question the realism behind the Greek proposal considering how well the first bailout package worked… Popular opinion in Greece had previously swayed in favour of the Eurozone with the vast majority of citizens voting in favour of remaining in the 17-nation bloc. But since the Greek government announced the plan to reduce minimum wage by 22% and raise the retirement age but reduce the pension pay-out, there has been a snowballing effect in terms of Euro-dissidents. Many Greeks now oppose the Euro and the strict deficit-cutting measures it comes with; the benefits are beginning to pale in comparison to the consequences.
Considering Greece is swiftly approaching a presidential election, the influence of public opinion could be enough to de-rail the debt talks. With the Eurogroup already sceptical about Greece’s ability to enact the cuts it has promised a mess Greek default still remains a distinct possibility, the implications of which are dire to the greatest extent. Expect short-term Euro rallies if the Greek proposal is accepted by Eurogroup finance ministers, but understand that the Greek issue will by no means be resolved; default will continue to cast its shadow over Eurozone confidence and the single currency will remain under threat.
