By Nigel Hodges of Currency Solutions

This week, that began with as much gloomy news as we've come to expect, has ended with a show of real British bull dog spirit as sterling has gone from strength to strength in the markets.

Since Monday when snow blanketed the City and reminded us all to have a bit of fun the Pound has been trading at much firmer levels, maintaining support above 1.4 on the Dollar and 1.10 on the Euro. In these grim economic times that constitutes a very good week indeed!

The MPC decision to reduce the base rate to 1% has been interpreted as a piece of decisive policy and led the Pound to gain on the Euro.

The ECB decided to keep rates unchanged at 2% and with figures showing the Eurozone deep in recession territory, the ECB is beginning to suffer for its complacency as reflected in the current Euro-Sterling exchange rate.

However, the UK does remain deep in the quagmire. G Brown even had a slip up over the D-word in Parliament yesterday. Plunging inflation, thousands of job losses and ever-worsening growth predictions remain very firmly in the economic picture and the IMF expect the UK to be one of the countries worst by the de... I mean recession.

Baugur has become the latest high profile victim of the credit crunch after filing for bankruptcy protection yesterday and the NISER predict a 3.8% drop in consumer spending and an 8.8% decline in business investment in the UK in 2009.

So far, so depressing.

What does seem to have changed is that markets are becoming somewhat de-sensitized to bad news. In the UK at least, recession has become an accepted state and markets are tending to focussing on more ambivalent results.

The Dollar has conceded ground to the Pound in a week that has been relatively light for US data. The private sector shed 522,000 jobs in January and non-farm payrolls are likely to show a rise in the overall unemployment rate.

The Federal Reserve rescue package remains in the Senate and we could see some Dollar strength and return of risk appetite when it gains Congressional approval. This week President Obama's 'Buy America' clause came under fire from foreign leaders as a thinly veiled form of protectionism. Obama responded that he wants to avoid a 'trade war' when global trade is necessary to financial recovery.

The Eurozone appears to be moving into the eye of the storm as figures show it is sinking deeper and deeper into recession.

Retail sales have contracted 1.6% in the year to December and unemployment has risen rapidly in Spain, by 199,000 people or 6% in January. Spanish unemployment sits at 14.4%, significantly higher than other EU nations.

The Czech Central Bank has cut rates to 1.75% and other Eastern European currencies have declined significantly against the Euro since December. The Czech Koruna has dropped 7.1%, the Hungarian Forint by 11.2% and the Polish Zloty by 13.3%.

It is expected that the Eurozone will continue to weaken in coming months as it moves into the trough of the downturn.

As a global economic crisis that began in the US and spread to the UK and Eurozone, the consensus is that recovery will follow a similar logic and any upturn in Sterling is expected to trail the US by 1-2 quarters.

General market sentiment is that the Eurozone has done too little, too late with regard to decisive economic policy. While the Federal Reserve and Bank of England have undertaken significant monetary easing alongside rate reductions, the ECB continues to sit on its hands and this is lowering market confidence in the Euro.

While market shocks provided a large degree of the initial volatility, we are now seeing the downturn spread as it trickles into trade, tourism and contracts export markets. For many of the world's peripheral economies this is the beginning of a long slow downturn.

For Eastern European currencies seeking to join the Euro this may delay the accession process.

Stability is a key prerequisite and the current downturn is making it impossible to find. Poland is also the largest of the Eastern European economies, whether this enhances or diminishes the effects remains to be seen.

In the coming weeks, economic data is likely to get worse from the Eurozone, with little policy activity to remedy it. It seems the dovetailing towards parity between the euro and sterling that we saw in the New Year has been left in the distance.

At the same time, we are just moving into the period where MPC activity over recent months could start to make its mark on the UK economy. While it is too early to speak of recovery just yet and volatility is certainly not confined to the past, the general feeling is that markets have come to their senses and the extreme trading ranges we have seen may be abandoned in favour of smaller ranges.

Call it learning to live with recession.

So have a good weekend and speak to your dealer if this has caused you even more confusion!

Footnote - It could be a case of fools rushing in.... but I have agreed to do a charity skydive this month for Global Angels, an international children's charity. Your support would be greatly appreciated!

http://www.globalangels.org/fundraiser/CurrencySolutions/

Ok endorsement over. But don't forget to donate!

The Euro is the official currency of the European Union. As the single currency for over 15 member nations, known collectively as the Eurozone (Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Spain), it directly affects over 320 million people.

The Euro is also used in a further 11 countries, while others have currencies 'pegged' to the Euro.

Consequently, the Euro affects over 500 million people and has the largest cash circulation in the world. At present, the UK and Denmark have each negotiated with the EU to retain their own currencies, while Sweden declined to adopt the Euro in a referendum in 2003.

The Euro is managed and administered by the European Central Bank (ECB), based in Frankfurt, and the Eurosystem, a collective of Central Banks from Eurozone member nations. Although a common market place has been the objective of EU members since 1957, this goal came to fruition with the 1992 Maastricht Treaty which provided the legal framework for the single EU currency and the founding of the ECB.

The Euro was introduced in 1999, initially as an accounting currency, with physical notes and coins coming in to circulation on the 1st of January 2002. The symbol for the new currency was designed by Belgian Alain Billiet, and according to the European Commission:

Inspiration for the € symbol itself came from the Greek epsilon (Є) - a reference to the cradle of European civilisation - and the first letter of the word Europe, crossed by two parallel lines to 'certify' the stability of the euro.

Since its inception the Euro has rapidly established itself as a heavyweight in the global foreign exchange market. At present it is second only to the US Dollar in terms of international strength and stability.

Economics

The benefits of a common marketplace have long been exalted by economists. By negating fluctuations in exchange rates between neighboring countries, the adoption of a single currency allows greater and more profitable, trading among neighbors. Within the Eurozone, international payments are considered domestic. Greater price parity has also been achieved among nations, and macro-economic stability has occurred as the Euro has delivered improved liquidity, flexibility and stability for both national economies and the region as a whole.

Because low inflation is a hallmark of economic stability, this has become the central concern of the ECB. The ECB operates independently of its member nations and unlike its US counterpart, the Federal Reserve, does not have the secondary concerns of sustained growth and employment within its mandate.

Its unique status as a common currency means the Euro is only as strong as its member states. Consequently, membership of the Eurozone brings with it strict criteria regarding economic stability and budget deficits, as outlined in the Maastricht Treaty.

Since 1999, low inflation and stability have made the Euro attractive to investors and it is now the world's second largest reserve currency after the US Dollar. By the end of 2006, more than one quarter of foreign exchange holdings were in Euros, up from 18% in 1999. At present, the Euro is the second most active currency in terms of foreign exchange, accounting for around 40% of global daily transactions.

Influences

The Euro is a floating currency and as such, is characterised by fluctuations in its foreign exchange rate.

After its introduction in 1999, the Euro was heavily devalued on foreign exchange markets, particularly in relation to the US Dollar. Making an initial appearance at US$1.18/€, the Euro dropped to $0.8228/€ by 26 October 2000. However with the implementation of the physical currency in 2002, the Euro began to appreciate and has since retained its international value.

The strength and size of its member nations, the status of the Euro as a reserve currency and its prominence in international political organizations, ensure the Euro will retain its international strength.

Future

Widespread volatility is likely to characterise markets for some time as nervous investors, low market confidence and reactive markets make forecasting foolish at present. Throughout the credit crunch, the Euro has fluctuated widely and change will be the only constant in the short-term as financial news emanating from the US will continue to shape global markets.
However, the Euro is likely to retain its international value, and has even fared well despite the credit crunch, as its strength and stability have been sought as a safe haven for risk adverse investors. The diversity of the Euro's constituent nations will also help the currency to weather the international storm.

Euro - United States Dollar - last 12 months

Source: http://newsvote.bbc.co.uk

Throughout the recent crisis, the ECB has worked in conjunction with the Federal Reserve and Bank of England to ensure international liquidity in the financial sector. Barclays' analysts argue weakness in the Eurozone has been exaggerated, with some appreciation expected once oil prices have stabilised and a picture of growth prospects becomes clear.

Economic slowdown in the Eurozone is apparent, and Ireland has recently tipped into recession while Spain and Germany seem to be teetering on the brink. As global demand is reduced, particularly from the US and the UK, European products may struggle to find markets, but conversely, a lower value currency will increase their export competitiveness. Declining oil prices have also helped to relieve inflationary pressures.

It will be interesting how the euro handles the global financial pressures over the coming months. However as is always the case with markets, volatility and fluctuations always provide favourable conditions for someone, somewhere. Information and expert advice on when to trade is key.

This blog was provided courtesy of Currency Solutions.

Currency Solutions are experts in the currency markets and will help you achieve an exchange rate at the most opportune time thus ensuring you will receive more for your money.

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