Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 24th of May.
Last night’s policy discussions in Brussels are sure to give German politicians and officials serious food for thought. Stimulus loans, Eurobonds and less stringent austerity measures for the peripheral states: they are sure to give Europe’s paymaster serious indigestion.
The new proposals, forced to the table by Francois Hollande, are a welcome break from the endless dose of austerity. However, the truth is despite Hollande’s bold initiatives, European leaders are still not discussing these bold initiatives.
The first step towards the initiative would be to accept that the struggling north European countries are in trouble not because of fiscal profligacy of the governments, but because of the private sectors, particularly the banks.
Local banks had funded a huge property bubble in Spain Ireland, which in turn was funded by large banks from Germany, France and the UK. Everybody was invited to the party!
Secondly, it’s important to recognise that the bad loans to fund those bubbles are gone forever, and banks from the region, both strong and weak economies included, must be recapitalised without further delay. The governments must face the taxpayers with this bitter truth of another round of bailouts.
Finally, Germans need to open up to the idea of higher inflation that needs to come from greater public spending and lower taxes. Unless Europe’s biggest economy drives up domestic demand, Berlin’s poor neighbours will never be able to become competitive, increase their exports and pay down their debts. If that sounds far-fetched, EU leaders better start calculating the cost of a possible euro break up.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2461
GBP/US$ – 1.5682
GBP/CHF – 1.4972
GBP/CAN$ – 1.6078
GBP/AUS$ – 1.6062
GBP/ZAR – 13.151
GBP/JPY – 124.67
GBP/HKD – 12.175
GBP/NZD – 2.0843
GBP/SEK – 11.231
EUR: The single currency continued to slip over uncertainties in the Eurozone and tumbled to a 22-month low against the greenback on Wednesday. Euro started the day on a soft note and speculations on “Grexit” hit the headlines as the day wore on. The informal EU summit in Brussels failed to yield any relief for the country except for the formal reaffirmation of support to Athens’ continuation in the single currency union. The uncertainty ensured that the smart money flooded safe haven Berlin with German bund yields hitting record low levels. The cable also benefitted for the prevailing euro weakness despite a dovish Bank of England minutes and lower-than-expected UK retail sales reading. The GBP/EUR opens at 1.2485 this morning.
USD: Sterling hit a two-month low against the greenback on Wednesday as flight to quality continued following a softer than expected UK economic data release. The April UK retail sales reading came in at -2.3 percent against +1.8% in March as fuel sales tumbled. The GBP/USD pair tumbled to 1.5675 as US new home sales data came in above expectations. Sterling came in under pressure this morning as the first iteration of UK GDP shows growth fell to -0.3 percent from the earlier -0.2 percent. The GBP/USD pair opens at 1.5660 this morning.