Mario Draghi: EU can’t be turned into a money transfer union

Mario Draghi: EU can’t be turned into a money transfer union

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 23th of March.

Those of you, who thought Europe was out of the woods, need to think again. The European contagion remains a clear and present danger. Also Greece remains in the race as the proverbial party-pooper. But first let’s tackle the eurozone. Germany and the rest of Europe witnessed a drop in manufacturing PMI in February, suggesting the January expansion was more like a flash-in-the-pan and a prolonged slowdown is more of a reality. Before the EU crisis broke out, we spoke of a two-speed Europe where the stronger countries led by Germany and France, were expanding while the peripheral states contracted. The situation now seems changed and Germany risks emulating weaker states as far as growth is concerned. The economic parameters however, remain starkly different.

Meanwhile, European Central Bank (ECB) president Mario Draghi remained opposed to both Greece’s exit from the EU and eurozone bonds. Mr. Draghi rightly pointed out that by exiting the EU, Athens’ cup of woes won’t stop overflowing and neither the need for fiscal restructuring would diminish. Rather Greece would witness spiraling inflation and find it difficult to raise money from the capital markets. Greece needs to accept that a loss of wealth and a reduction in the general standard of living is inevitable to restore competitiveness. Lauding the new fiscal union agreement, Mr. Draghi said the EU can’t be turned into a money transfer union where a handful of countries pay while the remaining spend, and the entire facility is funded by Eurobonds.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.1985
GBP/US$ – 1.5870
GBP/CHF – 1.4447
GBP/CAN$ – 1.5861
GBP/AUS$ – 1.5274
GBP/ZAR – 12.198
GBP/JPY – 131.39
GBP/HKD – 12.3180
GBP/NZD – 1.9526
GBP/SEK –  10.771

EURO: The single currency suffered over poor economic numbers yesterday as manufacturing and service sector reading for the 17-nation union came in lower than expected, showing contraction for March. A drop in PMI number may now mean that Q1 GDP for the region has actually contracted. The situation was aggravated further as yields on Spanish and Italian moved above the 5 percent mark and a German Finance ministry official commented that the current mechanism is inadequate to deal with a Spanish and Italian crisis. The GBP/EUR pair witnessed a sell-off to drop to 1.2049 after the European PMI numbers came in only to recover later. There’s no market moving data due from Europe today and the GBP/EUR pair opens at 1.1972 this morning.

USD: Strong economic data from the other side of the pond ensured the US dollar remained firm across the board yesterday. Jobless claims came in lowest since February 2008, reinforcing the recovery theory. UK domestic data failed to cheer as retail sales number came in lower than expected, driving the GBP/USD lower to 1.5791 during the day’s trade. There’s not much economic activity today except the US new home sales data and the GBP/USD pair is expected to remain range-bound today. The GBP/USD opens at 1.5876 this morning.

 

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