Europe’s prospects look bleak in 2013

Europe’s prospects look bleak in 2013

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 28th of December.

Despite going through a double dip recession and clear signs of austerity fatigue, hope springs eternal for Euro supporters. Many investors seem to believe assurances of European leaders that the worst is behind us and have forgotten how previous assurances since the crisis broke out in 2010 fell flat. Apparently they also disregard the underlying economic and political forces now at play in Europe.

Not that the current complacency is without any reason. Mario Draghi’s bold action, the so-called Outright Monetary Transaction that allows the ECB to buy sovereign bonds from the secondary market of stricken economies, eased the pressure on Italy and Spain. German Chancellor Angela Merkel’s change of heart towards Greece was another turning point. Despite opposing a third bailout package, Merkel eventually approved the money, mindful of the possible electoral backlash when Berlin goes to elections in September 2013.

But there can be further political deterioration in the European peripheries in 2013. The shaky Greek coalition government may fall, virtually ensuring the Hellenic country’s exit from the currency union. Similarly anti-austerity sentiments and regional discontent in Spain will make it extremely difficult for Mariano Rajoy to seek ECB intervention for financial support.

A powerful centrifugal force is already underway, threatening to take non-euro members out of the EU. For some, like the UK, the euro-project was never more than a one-dimensional single market in the first place. Some euro zone members may act more decisively when the choice between a stronger currency union and a smaller EU is presented before them in 2013.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2160
GBP/US$ – 1.6107
GBP/CHF – 1.4697
GBP/CAN$ – 1.6015
GBP/AUS$ – 1.5508
GBP/ZAR – 13.6814
GBP/JPY – 139.02
GBP/HKD – 12.4882
GBP/NZD – 1.9623
GBP/SEK – 10.4820

EUR: The single-currency had a fairly steady week despite European market closures and the US fiscal cliff impasse, reaching an eight month high of 1.2160 against cable and a one week high of 1.3280 against the US dollar. Investors have shown preference for the common currency after UK consumer confidence and retail sales fell short of estimates while a ratings downgrade loomed over the horizon. We have the French consumer spending data and Italian 10-year bond auctions are due today and the euro is likely to see volatility on disappointing data. The GBP/EUR pair opens at 1.2134.

USD: The currency market has seen little change since yesterday as positive US economic data was offset by the continued deadlock over budget negotiations. Republicans have effectively shot down President Obama’s proposal to hike taxes on wealthiest Americans. A bigger problem will arise when the country hits the debt ceiling on Monday and any lack of resolution may result in Washington defaulting on its debt obligations eventually. Treasury Secretary Tim Geithner is expected to activate “extraordinary measures” that will allow the country to fund $200 billion in budget deficits, but stop-gap arrangement won’t last beyond February. A similar situation in summer had resulted in a US downgrade by S&P and Washington may face another humiliation if the current political circus carries on for long. There’s not much data expected to be released from the UK today and the GBP/USD pair sits at 1.6092 at the time of writing.

Have a great weekend!

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