Pound soars to 19-month high against the euro

Things might not be going swimmingly in Britain at the moment, but that hasn’t stopped the pound hitting its highest level against the euro since September 2010.

The pound is rising again - at the euro's expense (Image © PA)

It’s not a great day for the British economy. A new report from the Ernst & Young Item Club has predicted terrible growth for the economy for the rest of the year while strikes, cuts, record petrol prices and high unemployment all add to the general gloom.

But thank goodness we’re not in the euro.

Because despite all the pessimism and doubt surrounding the UK, the euro area is even worse off – or at least that’s what traders are thinking.

Today the pound hit its highest level against the euro since September 2010 – providing a much-needed boost for people heading to the continent or those already living over there and drawing their pensions or income in pounds.

While still a long way off the €1.50 exchange rates seen before the financial crisis in January 2007, or the €1.60 you could get in 2002, a British pound now buys you almost €1.22.  That’s a big improvement compared with a few months ago when it looked like the pound could actually drop below the price of the euro.

[Related feature: How do you leave the euro?]

The pound's performance against the euro over the last year

The pound has risen steadily agains the euro over the last 12 months

Why the pound is rising against the euro

The two biggest things going for the pound on Monday were bad news from Spain and good news from a credit ratings firm.

Spain’s economy – one of the biggest in the eurozone – is rocking badly and the signs are that it could need a new bailout soon.

These worries also meant the cost of Spanish debt rose above 6% for the first time in 2012, a level that analysts see as unsustainable in the long term.

And Spain was not alone in seeing its cost of borrowing rise, Italian debt also saw interest rates creep up on Monday.

“The situation is raising concerns that Spain is heading towards needing a bailout fund at a rate faster than EU politicians can agree to raise the eurozone firewall,” Richard Driver, currency analyst at Caxton FX, told Yahoo! Finance.

“Spain aside, the euro was due a downward correction, particularly with the region heading into another recession and the effects of the ECB’s cheap loans having worn off.”

On the positive side for Sterling, on Friday debt ratings agency Standard & Poors confirmed that Britain’s AAA rating for debt was secure for now.

That has led to investors moving from the euro to the pound.

Rise to continue

With no major economic news out until Wednesday, the pound should stay strong against the euro until then at least.

Worse than expected unemployment figures or an overly negative set of minutes from the Bank of England on Wednesday could push the pound down again - but analysts are cautiously optimistic that the pound will continue its growth for some time yet.

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