Political Discontent In Europe Over High Debt To GDP Ratios

Political Discontent In Europe Over High Debt To GDP Ratios

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 16th of August.

Spanish Prime Minister Mariano Rajoy’s decision to extend long-term unemployment benefits yesterday may be termed populist by some as the move is likely to widen the country’s budget deficit. Similarly UK’s improved jobs data will come as a relief for the coalition government. Unemployment has a serious bearing on politics and as the US goes to elections in November, the fate of incumbents will be decided based on the unemployment situation.

The situation is not much different on this side of the Atlantic. However, the policy battles between ‘austerity’ and ‘growth’ is fought differently on either side. While many on the left believe more spending is required to lift economies out of slowdown, a considerable majority on the right believes fiscal consolidation should be the government’s top priority.

In Europe, there have been political flare ups over large budget deficits and high debt-to-GDP ratios. Stronger economies like Germany demand strict fiscal discipline from the indebted South where voters and unions have rejected austerity measures. While the US has managed to dodge a bond market backlash thus far, fiscal sustainability due to higher debts remain pose a serious problem nonetheless.

Additionally, issues over long-term structural adjustments also remain on either side of the pond. In Europe, trimming the public sector, raising the retirement age for public pensions, reforming taxes and curtailing welfare-state excesses continues to pose serious challenges.  With a sizeable population in Europe now struggling, politicians face a daunting task ahead with little room for political and economic error.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2742
GBP/US$ – 1.5639
GBP/CHF – 1.5322
GBP/CAN$ – 1.5485
GBP/AUS$ – 1.4926
GBP/ZAR – 12.9172
GBP/JPY – 123.94
GBP/HKD – 12.1359
GBP/NZD – 1.9402
GBP/SEK –  10.4826

EUR: The single-currency tracked lower against the cable on Wednesday after UK jobs data showed signs of improvement, adding 210,000 jobs in the three months ending in June. Sterling rallied to 1.5700 from the session low of 1.5658 on the back of robust employment data, but failed to hold ground after the latest minutes from the BoE MPC meeting showed policymakers discussed further assets purchase despite approving £50 billion in quantitative easing in the month prior. The GBP/EUR traded at 1.2777 from 1.2687 after media reports suggested Spanish PM Mariano Rajoy has extended the government’s long-term unemployment benefits, a move that is likely to widen the country’s fiscal deficit further. Data from Europe remains light today with the Eurozone inflation number being of any consequence. GBP/EUR opens at 1.2750 this morning.

USD: The greenback strengthened yesterday over some better than estimated US economic numbers, particularly the July industrial production number. Inflation reading came in lower than estimated with the CPI number for July falling to 0.1 percent in July, but combined with last week’s robust jobs data, another round of assets purchase by the Federal Reserve looks less likely. The US economic calendar is loaded with the initial unemployment benefit claims data and the number of residential building permits granted due today. UK retails sales number for July is also expected to attract market attention, even though markets are anticipating a fairly grim number due to the unreasonable weather. GBP/USD opens at 1.5644 this morning.

The UK July retail sales reading will attract some attention today morning. The GBP/USD pair opens at 1.5644 this morning.

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Have a great day!

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