'Bag a Bargain' - GBP/EUR Exchange Rate Conversions Rise as Traders Buy Discounted Sterling

The euro has been suspiciously resilient against the British pound (GBP) through October; but the sudden fall in the latter half of the past week confirms markets may have been over-optimistic in their valuations on the shared currency.

Despite some consensus-beating employment market data being release mid-week markets hardly touched the pound. Indeed, following the release of poor US economic data the pound was punished severely as US bond yields dragged UK bond yields lower in sympathy.

Then on Thursday morning some big sell-orders were triggered and the euro plummeted. At the weekend we see:

• The pound to euro exchange rate is trading 0.00 pct higher on a day-on-day basis. The conversion sees 1 GBP = 1.2607 EUR.
• The euro to pound conversion rate sees 1 EUR = 0.7934.

Note: The above quotes are taken from the wholesale markets, your bank will affix a spread to the rate at their own discretion. By actively seeking out a better rate with an independent FX provider you could get closer to the market and save up to 5% more FX in the process. Please find out how.

Why is the Euro Now Being Sold?

The Eurozone economy is back in focus once more - we have seen the euro being hit as peripheral bond yields spike investors reduce exposure to these economies.

Greek bonds are in free fall; ten-year yields have risen to 8.8% from around 5.5% in the middle of September. Perhaps even more worryingly, three-year yields have risen to 7.4% from under 4%.

And, contagion is in play as Italian, Spanish and Portuguese bonds are also hit hard.

This confirms that markets may be ready to abandon the Eurozone in the face of non-existent growth, indebted consumers and the unwillingness of some key governments to bit the bullet and reform their moribund economies.

As RBS say, we could be approaching the end-game in Europe unless the ECB takes decisive action.

Meanwhile, Long-Term Support Seen for GBP as Economy Grows

While the Eurozone struggles the UK has been confirmed as the best performer of the world's ten largest economies by the IMG.

Further good news came in October when UK unemployment was shown to have fallen at its fastest rate ever in the October labour market release from the ONS.

The unemployment rate fell to 6.0%, and the annual earnings growth picked up more than expected up 0.9% on the ex-bonus measure.

The GBP however failed to find any lift against the euro on the news suggesting that markets are either:

• concentrating on non-UK events,
• are simply mis-priced on the pound and will need to play catch-up,
• or are sceptical that the Bank of England will raise interest rates as early as they are predicting

Lloyds Bank Research believe the latter point to be relevant - perhaps markets have oversold the GBP, particularly against the euro:

"The move lower in US yields in the afternoon dragged UK yields lower with it. This subsequently left market pricing for the first rate hike for end-2015.

"We view market rate expectations are too dovish at present. We still think it is likely that UK interest rates will rise well ahead of prevailing market expectations, and that spread widening associated with this will support GBP against the EUR."

Moving forward we keep an eye on the equity markets as they are the obvious window into investor sentiment.

We believe that should the sell-off continue then the euro will inevitably find itself bearing the brunt of the moves, particularly if sentiment on the Eurozone continues to sour.

What we expect in coming months is a new announcement by the European Central Bank that extraordinary measures will be taken to prop up the Eurozone economy.

This will likely include full scale quantitative easing - the most euro-negative event possible.

As Easy Money Dries Up, So Do Euro-Positive Inflows

Investors have been chasing high-yielding and risky assets using the ultra-cheap cash at their disposal; this largely being provided by an obliging US Federal Reserve via their money printing programme.

Investors have loaded up on southern European government and corporate debt as well as emerging market debt.

"Now the flow of central bank liquidity is drying up. The U.S. Federal Reserve has pared its bond purchases, and the debate has turned to rate increases. The ECB’s efforts to date aren’t seen as a replacement," says Richard Barley at the Wall Street Journal.

Investors have made extremely good returns on southern European government bonds this year; but the risk is that many now seek to book profit on those gains and spark an exodus that will in turn only exacerbate the flames.