Pound:
The pound continues to trade within 1.10 against the Euro and is holding above 1.52 against a weaker USD. In the most recent UK economic news, Bank of England MPC member, Charlie Bean delivered a speech yesterday highlighting that “The deficit now looks set to be around 12% of GDP this year, which is unsustainable in the medium term.. the recent depreciation of sterling appears to owe something to heightened fears about the UK’s fiscal prospects.” It seems pretty obvious to all that there needs to be a clear strategy as to how the public deficit will be sorted out before any confidence is restored in the UK. This has become a key political battleground before the general election with the Labour government and the Conservatives in disagreement over how quickly the problem should be tackled. Until we know who will gain the majority vote (if any), uncertainty over the UK will continue to hinder prospects for sterling. Charlie Bean went on to say that he welcomed the fact that the UK economy had come out of recession but said risks to the recovery remained. Banks were still reluctant to lend and the recovery of Britain’s main export markets looked fragile.
The Bank of England minutes are also due at 9.30am. A continued slow recovery looks likely…
US Dollar:
Whilst many expected the Federal Funds rate to remain the same, some investors were hoping to hear more hawkish comments from the Federal Reserve. Unfortunately these remarks were not forthcoming and as such the Dollar declined against 13 of its 16 most commonly traded pairs. The Federal Reserve left the fund rate target between a range of 0% and 0.25%, where it has been since December 2008. The U.S. dollar dropped to $1.3803 per euro from $1.3766, after reaching $1.3818, the lowest since Feb. 9.
The Canadian Dollar continued its march to parity with the US Dollar after another strong day following an increase in the price of oil, one of its major exports. Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo summarises the situation by commenting “expectations for low interest rates in the U.S. and Japan are fueling risk appetite, the bias is to sell the yen and the dollar and to buy commodity-linked currencies.”
Today sees Ben Bernanke testify alongside Paul Volcker, the agenda is not focused on rates, however, the power of the men in question will no doubt shake the markets as they discuss the central bank’s power and monetary policy.
Euro:
Yesterday saw the Euro rise against the dollar, climbing to $1.3803 from $1.3766, unfortunately, this rally is viewed by many as small correction or blip and by no means a long term trend. So far the Euro has started strongly, this is surprising as damning comments from all directions are putting pressure on the Euro. Harvard University Professor Martin Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said Greece’s austerity plan will fail and the country may quit the single currency to fix its fiscal crisis. Furthermore, meetings thus far have proved fruitless as many market analysts see the outlook as confusing. Angela Merkel, the German Chancellor, issued a statement this morning saying that removing Greece from the single currency is an absolute last resort, however, a bailout of Greece using German funds would be against German law, a law which Angela Merkel is not willing to break. It is this uncertainty that is putting a serious dampener on any form of Euro recovery.
We have seen quite a lot of market volatility as a result of future plans for Greece, two weeks a ago saw a rise in the Euro after Greece’s austerity package was well received by the markets, however, Euro short selling is highly likely as David Owen from Jefferies Fixed Income suggests Greece “It must cut by 4pc of GDP in one year” which, to all intents and purposes, is monumental tightening.
Quote of the Day
“What we love to do we find time to do.” – John L. Spalding
