Trade-24 Weekly Review 26/11/12

Last week we asked what was better those days- the GBP or the EUR. Back then the EUR/GBP traded at 0.8025. Analysts had more pessimism towards the EUR, saying the rate should drop towards 0.7850 in the following six months. What actually happened since then and what are the explanations of what happened?

Well, the EUR outperformed the GBP during the week that ended. The EUR itself was bolstered by expectations of a deal on Greece sealed on Monday, whereas the GBP was hit by pessimism concerning the British economy. The pessimism was expressed by the BOE on Wednesday in the minutes of the last interest rate decision. The minutes showed that the bank was in no hurry to cut the interest rate, but they did leave the door open for more QE to come. The reason they did not prolong their QE program was higher inflation in the UK. Altogether, the pessimism towards the economy comes from an assessment that the economic growth the British economy had in the third quarter was only because of the Olympics. In Q4 there are significant risks of  a contraction in the economy, according to news we got from Dow Jones.

The feelings of pessimism and optimism may change quickly. It just shows how fast the market changes its attitude towards assets. For example, if on Monday EU finance ministers will not reach an agreement, the same as it happened at their previous meeting, the EUR will fall vs. the majors. And as one analyst put it, the GBP is doing better when people worry about what is happening in Europe. When there is no reason to be afraid, there is no reason to prefer the GBP over the EUR.

What are the expectations? As opposed to last week, when we brought bearish EUR/GBP opinion from Wells Fargo, this time we show there are analysts who are bullish on the EUR/GBP. Nick Parsons, head of research for U.K. and Europe at National Australia Bank Ltd, thinks the pair is going to trade at 0.83 six months from now. The logic behind his prediction is that the risk of a third recession in Britain is still high.

Keep in mind that the situation in Europe is gloomy no less than in Britain. The opinion brought here says that in Britain the situation is gloomier. Also keep in mind that Wells Fargo is the most accurate forecaster, according to Bloomberg, meaning that their forecast might be more precise, albeit past performance guarantees nothing about the future.

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