GBPEUR ABOVE 1.40- EURUSD AT 1.07. GBPUSD AT 1.50

GBPEUR Hits new high of 1.40

So what's next?

Today has been an absolutely monumental day on the markets; For the first time in 7 years we have seen the GBPEUR exchange rate above 1.40.

The first reason for this is the current situation in Europe- already this week we have seen weak trade balance and export data out of countries like Germany- and for a nation that relies on exports- weak data is not a good sign for possible recovery.

Yesterday the markets closed with GBPEUR at 1.39- and we opened today at 1.40- so what happened over night?

The Euro group held a meeting yesterday to discuss plans for Greece, I'm sure you all remember not too long ago that there was talks of a possible Greece exit from the Euro. The reason why we saw the Euro weaken even further over night was due to the fact that policy makers said that "Greece will not receive any aid money until there is a firm plan, and signs that is is being implemented." This of course, just confirms that nothing has been done so far with this situation, and further talks will be held from tomorrow.

So this is what put us on the verge of 1.40- however what took us over that level was a speech earlier this afternoon by BoE Governor Mark Carney, in his speech he talked about our economy in the UK, the current low levels of inflation and how the future looks for the UK. He first addressed questions about Stimulus by saying "Policy makers would be "extremely foolish" if they took the "unnecessary" step of trying to fight the current period of low inflation by pumping more stimulus into the economy."

This was extremely clear and immediately put strength into the Pound- he also added that low levels of inflation right now are not a problem for the UK and inflation will be back to target within 2 years.

So with the Euro so weak and the Pound and Dollar gaining so much strength, I know the next question on your mind is how far will this go?

I think the Pound Euro exchange rate is correctly valued between 1.40-1.50, and as the UK economy stabilises and we begin our interest rate hikes over the next 12 months then I definitely expect the exchange rates to be above 1.40. However the main hurdle to look out for is the UK elections, political uncertainty in the UK will put weakness into our currency leading up to the elections, and depending on the outcome, we may see strength after.

For those who are watching the EURUSD exchange rate then you will have seen today that we are just above the 1.07 area, and still dropping. The EURUSD exchange rate has gone from 1.39-1.07 in 6 months due to increasing strength in the Dollar and further weakness in the Eurozone- I think it is still sensible to predict parity in this currency pair and possibly below depending on the outcome in Greece and the timing of interest rate hikes in the U.S.

If you require further information then please don't hesitate to contact me directly.

Prem Raja

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www.thecurrencyblog.com