Pound hits 7-year high, but may have peaked, as Eurozone recovers

The pound to euro exchange rate has touched 1.3803 today, its strongest since December 7th 2007.

 by Peter Lavelle

The pound to euro exchange rate has touched 1.3803 today, its strongest since December 7th 2007, or 7 years and 3 months. This is chiefly because UK manufacturing output hit a 7-month high in February, while Greek finance minister Yanis Varoufaki continues to imply the risk of Greece exiting the Eurozone.

However, in spite of this, sterling may have now peaked versus the euro, as both Eurozone deflation and joblessness fell recently, while the UK housing market underperformed last month.

Pound rises, as UK factories accelerate, while Varoufaki defies austerity

Sterling hit 1.3803 today, first because the UK manufacturing sector’s Purchasing Manager’s Index (PMI) hit 54.1 last month, according to economics group Markit. This was well above both the 50.0 line that divides growth from contraction, the 53.4 consensus forecast, and also constitutes a 7-month high. It suggests that the UK’s factories are resurgent in early 2015, thereby strengthening sterling.

At the same time, the pound has climbed versus the euro, because Greek finance minister Yanis Varoufaki  told Athens radio station Parapolitika 90.1 today that "If they [the Troika of Greece’s financers] ask me to continue with the work of austerity I won’t do it.” This tells us that it’s still possible that Greece will exit the common currency, should the Eurozone ask too much of Greece, and explains the euro’s fall.

Sterling may weaken, as Eurozone deflation eases, while UK mortgage approvals disappoint

However, 1.3803 may wind up being sterling’s peak versus the euro, at least in the immediate future. This is because, first, Eurozone deflation eased to –0.3% last month, according to official statistics body Eurostat, beating predictions of a –0.5% drop. This suggests that prices aren’t falling so rapidly in the common currency zone as financial markets expect.

Second, sterling may also have peaked versus the euro, because Eurozone unemployment unexpectedly fell –0.2% in January, to 11.2%, the least since April 2012. This indicates that Europe’s job market is slowly gaining traction, and that, as Bill Adams, senior international economist for PNC Financial Services Group notes, “the latest labor and price data for the Eurozone look less awful.” This may support the euro, therefore.

Last of all, sterling may fall thanks to UK weakness in the near future too, because Britain’s lenders approved just 60,786k new mortgages in January, according to the Office for National Statistics, more than -200 less than forecast. As George Buckley of Deutsche Bank puts it today, this indicates that "Housing remains sluggish” in the UK, and this may stop sterling from scaling new heights, at least for now.