F/X Weekly comment

Interesting times indeed in all financial markets, including foreign exchange. It's not very often that I mention the USA in my weekly ramble around the pound/Euro rate, but I think they're worth a mention this week.

USA - showtime
Debt ceiling. To you and me, the amount of debt you have when you finally turn round and say 'No more'. In the case of the US it has a slightly different meaning, more like 'OK, how much more do we need?' That is until now, when a few quarrelsome senators have decided that a few thousand trillion dollars might just about be enough, much to the dismay of President Obama and everyone else who keeps the States running. If the debt ceiling isn't raised by Tuesday, The USA will start to default on its debts, as it won't be able to borrow any more money to pay creditors.
Should this worry us? YES! The USA is the largest economy in the world. They owe everybody money, including you, me Europe in general and the UK in particular. So now we have not only the Eurozone up rue Merde sans pagaie, we have the Septics in the same boat. We now have the possibility of not just European contagion, but also Global debt contagion. What fun!
One outcome of this is that market F/X speculators are looking round for a currency where there is some semblance if financial stability, and believe it or not, relatively speaking we fit the bill.

UK - same old story
The Pound hasn't had the best of weeks, and yet it has benefited from events abroad, both in Europe and the US. Both this week's CBI report and consumer confidence data were poor. The outlook for the UK economy is still uncertain as we struggle to overcome the drag of the austerity package during a weak recovery phase.

Eurozone - guilty as charged?
The Euro has suffered this week for various reasons. Worse than expected German unemployment, a drop in economic sentiment and weak appetite at an Italian government bond auction all contributed to the Euro's woes. Fear of contagion in the Eurozone has not gone away and uncertainty is likely to slow any major Euro advance against the pound over the next few weeks. The European Sovereign Debt crisis continues to hit the heasdlines. In the short term the ECB has enough reserves to maintain stability, but with combined soveriegn funding requirements of over €80Bn during the next three months, the feeling is that they might be running out of breathing space. I can only see the debt problem getting worse over the rest of the year. The jury is still out over Greece and the second bailout, and it could get interesting.

What now?
Call me an optimist if you lie, but I think that the Euro is in trouble, and this could be the start of something good for sterling. I, for one, hope so! 1,1500 or higher would be a good signal by next week.