EU is banking on US stimulus to get out of recession

EU is banking on US stimulus to get out of recession

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 17th of January.

The European Central Bank decided to leave its policy unchanged for a clearer image of the economy to emerge. With youth unemployment levels in Spain and Italy at the Great Depression level, governments need to scale down austerity measures, say many economists, including some at the International Monetary Fund. The spending cuts may have gone too far, they caution.

Many argue Germany, with its de facto control over the ECB, inflicted the austerity-driven recession on the Eurozone. Spending cuts in response to recession is the medical equivalent of bleeding the patient, they point out. The correct response is to undertake counter-cyclical measures, known as automatic stabilisers, which drive up private and public sector demand through a policy mix of tax-cuts and higher government spending.

There is no doubt austerity aggravates recessions and the recent results have only reinforced economic theories. The eurozone experimented austerity while the US went ahead with stimulus. The EZ slipped into needless recession with the peripheries witnessed depression. America’s policy on the other hand, produced a moderate but sustained recovery.

The paradox is European austerity supporters are now banking on the US to help get out of the mess. They hope the successive Fed stimulus will boost the US purchase of European goods and services rapidly, eventually pulling out the eurozone out of recession. Ironically the US political class now wants to reverse course and follow the austerity footsteps of Europe. The same people, who wanted to avoid austerity, now demands massive spending cuts despite witnessing the devastation austerity has inflicted on Europe.

EU policymakers are hoping a strong US recovery will pull it out of the fiscal drag of spending cuts. It will be better still if the Germans ease the austerity brake and help the US pull the region out of recession.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2024
GBP/US$ – 1.5982
GBP/CHF – 1.4947
GBP/CAN$ – 1.5775
GBP/AUS$ – 1.5212
GBP/ZAR – 14.0462
GBP/JPY – 141.55
GBP/HKD – 12.3825
GBP/NZD – 1.9034
GBP/SEK – 10.3853

EUR: The single-currency slipped against the US dollar for a second day on Wednesday as investors chose to book profit on the back of the recent rally, pushing the EUR/USD pair down to 1.3272 in overnight trade. Euro was on the back-foot for the better part of yesterday after Eurogroup President Jean-Claude Juncker said the high value of the shared-currency may potentially harm the euro area economy. The EUR/USD pair however recovered from a low of 1.3255 to 1.3288 after Austrian central bank governor Ewald Nowotny said the current exchange rate was not a matter of major concern. Today sees very little data released from the euro-area. The EUR/GBP pair opens at 1.2019 this morning.

USD: Sterling came under heavy selling pressure yesterday as investors continued to worry about UK’s triple-A rating and the resulting loss of status as a safe haven currency. GBP/USD tumbled below the 1.6000 level for the first time since November to hit a low of 1.5975 after a World Bank report cut global growth forecast to 2.4 percent from an earlier 3 percent citing subdued economic activity in the advanced economies. US inflation reading came in as expected yesterday while industrial production and housing numbers printed better than expected. The key data releases from the US include unemployment benefits and construction permits while UK traders will eye David Cameron’s plans on repatriating powers from the EU. This uncertainty about Britain’s continuation within the EU is hurting the cable.

Have a great day!

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