EUR/USD pair dropping below 1.2200 for the first time since 2010

EUR/USD pair dropping below 1.2200 for the first time since 2010

By Sayan Guha.

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 13th of July.

There’s no easy way out!

Nobody will be dead in the long run and we still will be recovering from the recession. Hence the long term effect of stimulus measures should be considered in perspective, which sensible Keynesians recognise. They argue that a revival fuelled by government spending today outweighs the benefits of tomorrow as debts mature.

The main concern is whether significant government spending can make any real difference to severe unemployment problems. The case for a general stimulus becomes less compelling under such cases. A general increase in govt. spending may be ineffective in industries such as restaurants and retail. Greater demand in London won’t help families shopping in Essex (and hence create more retail jobs there). Rather targeted household debt writeoffs in Essex would be a better use of the stimulus sterling.

Public policy should help workers where there are suitable jobs. Publicly funded huge infrastructure projects are unlikely to help people since a well-developed UK is in less need of such measures. Instead retraining workers for private jobs would serve the economy better.

Japan is the classic case in point for spending through infrastructure building after the huge property boom and bust of the 1980s. Despite covering most of the country through concrete, Japan really never recovered fully.  For the Japanese, the long run has arrived; they are fewer, older with the highest per capita debt in G7.

On the contrary, the UK government is on the edge. With a huge financial sector dependent on the government’s financial standing, it can afford to take fewer risks. Austerity today is painful, but more credible today. Spending cuts and shared tax increases can instill a sense of purpose to help a nation weather through tough times. Popular Keynesians (not the sensible ones) who suggest there’s a quick-fix solution are possibly accelerating a revolution rather than a recovery.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2664
GBP/US$ – 1.5446
GBP/CAN$ – 1.5717
GBP/AUS$ – 1.5200
GBP/ZAR – 12.89
GBP/JPY – 122.51
GBP/NZD – 1.9505
GBP/PLN –  5.33

EUR: The single currency’s downhill journey continued on Thursday with the EUR/USD pair dropping below 1.2200 for the first time since 2010. The euro’s movement was at odds with economic developments in the EU where Italian borrowing costs dropped and European industrial production numbers came in better than expected. The cable continued to remain close to its recent 3-1/2 year high at 1.2704 though the day’s gains moderated as the GBP/USD pair weakened. Investors will closely watch Italy’s EUR 5 billion long-term bond auctions today after ratings agency Moody’s downgraded the country by two notches. In the absence of any tier 1 data from Europe today, the single currency is expected to maintain its negative momentum.

USD: The greenback extended its winning streak yesterday with the cable dropping to a five week low of 1.5393 as the allure for safe-haven grew after the Bank of Japan disappointed the markets with no further monetary stimulus measures. Amid relentless demand from investors for the greenback, the dollar index, a barometer of the USD’s strength against the world’s six leading currencies, hit a two-year high. US initial jobless claims, falling to its lowest level in four years, also propped the currency. The economic data calendar is light on the other side of the pond even though some attention will be paid to the Michigan University confidence number. The GBP/USD pair open higher at 1.5429 this morning.

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