Can Sterling continue its recovery as Euro Tumbles?

January 26, 2010 - Posted By (Admin) in (default)

Posted by Home Exposure Marbella, courtesy of Keith Spitalneck of Currencies Direct

Can Sterling continue its recovery as Euro Tumbles?

Finally it seems as though we are starting to turn a corner…..

At the time of writing GBP is trading at 1.1357 against EUR.

Yesterday the ECB president, Jean-Claude Trichet, said the central bank must do everything possible to boost confidence, signalling to the market that the ECB may cut rates from the current 1.25%. The next ECB meeting (and BOE meeting) is on 7th May. The ECB has a history of prepping the market ahead of any rate moves in order to avoid any surprises; hence these direct comments from Tritchet are quite a clear indication as to their next move. Bloomberg is predicting a 0.25% cut on 7th May. This sentiment places continued downside pressure on the Euro and could therefore see EUR remain under pressure.

We are also seeing small cracks in the ECB; the ECB’s Governing Council is split in opinion as to how best to tackle the current problems. Some members favour a more active approach encouraging rate cuts, following suit of other central banks, whilst others prefer a conservative approach. The ECB may come under strain as decisions become trickier to make. Trichet has denied this split; however, three different views from Germany, Greece and Austria have been voiced in the past week alone.

The G20 summit and the subsequent $1.1 trillion agreement designed to tackle the global financial crisis appeared to give Sterling significant strength against most major currencies, hitting one month and two month highs against the Euro and Dollar respectively.


 
The UK government may have to find an extra £39bn a year by 2016 to bring borrowing under control according to the Institute for Fiscal Studies (IFS). This is on top of the £38bn of fiscal tightening the chancellor announced in the pre-Budget report. Alistair Darling who is due to present his Budget on 22 April warned that the recession will be more severe than forecasted. This news (and any further negative data, statements or rumours) between now and the budget could weigh heavily on Sterling, causing rates to slide and the positive movement we have recently seen disappear.


The European Central Bank has expressed carefully worded concern that countries should not seek a competitive advantage over other member states by deliberately maintaining a weak currency. The Pound has dropped by over 25% on a trade weighted basis against the Euro and some feel it may be part of a deliberate policy to help UK exporters over their European counterparts. Without naming the UK specifically, Lorenzo Bini Smaghi, a member of the ECB’s executive board, reminded EU states outside the single currency that they had to treat their exchange rates as a “matter of common interest”. If this continues, then political pressure may increase on the UK government to do something about the value of the pound.

 
 
Kind Regards,
 
Keith Spitalnick
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