Is Francois Hollande on a collision path with the ECB?

Is Francois Hollande on a collision path with the ECB?

By Sayan Guha

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 27th of April.

French Presidential candidate Francois Hollande seems to have hijacked European Central Bank president Mario Draghi’s call for ‘growth compact,’ deviating from the often-repeated ‘fiscal compact.’ Unfortunately, Draghi’s statement in the European Parliament is not a call to deviate from the path of fiscal prudence, neither has it anything to do with Hollande’s definition of growth.

Nobody in Europe debates if growth is good for the region or if fiscal discipline should be enforced. Rather Hollande’s belief that France can avoid painful domestic reforms while the rest of Europe will continue to grow puts him on a collision path with the ECB, Germany and other EU partners. Though France continues to be highly competitive, a rise in current account deficit shows the country’s competitiveness has tumbled. Its labor costs have risen 39 percent in the past decade, more than twice as fast as Germany.

Hollande shares no common ground with Draghi if he thinks reforms isn’t the way forward. The central bankers have long been advocating for reforms, the longer the nations wait, the more difficult it will be. Should he win the elections, Hollande will be the first to hit the wall if he thinks France can be spared the pains of reform.

CURRENCY RATES OVERVIEW 

GBP/EURO – 1.2270
GBP/US$ – 1.6171
GBP/CHF – 1.4747
GBP/CAN$ – 1.5952
GBP/AUS$ – 1.5601
GBP/ZAR – 12.651
GBP/JPY – 130.67
GBP/HKD – 12.5482
GBP/NZD – 1.9921
GBP/SEK –  10.912

EUR: The single currency came under pressure in early trading yesterday following lower than estimated consumer confidence reading with the services, economic and industrial components declining over previous months. The EUR/USD pair remained in the 1.3200 and 1.3260 range after the Dutch government managed to pass the 2013 budget through the parliament that is in line with EU deficit guidelines, releasing some of the pressure building up in the political system. The cable however, rallied against the single currency to 1.2260 before profit taking pushed the GBP/EUR pair down to 1.2220. The single currency came under pressure overnight after Spain was downgraded two notches to BBB+. The situation for Madrid may be exacerbated as both borrowing costs and unemployment rate for the Iberian state continues to be high.  The GBP/EUR pair has jumped to a 22 month high of 1.2293 this morning on the back of the news.

USD: The cable advanced against the greenback for the ninth day, pushing the GBP/USD pair to a high of 1.6207, a level not seen since Sep 2, 2011. The pound continues to strengthen despite UK sliding back to a technical recession as investors’ hope rise for another round of quantitative easing by the BoE. The USD however, ended the day mostly unchanged as UK economic releases including the CBI’s realised sales number and a 10-month low mortgage approval reading, failed to cheer the markets. The market focus will remain on the Q1 GDP number in the US and an upside will put pressure on the GBP/USD pair. The GBP/USD pair opens at 1.6188 this morning.

 

 

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