FX Weekly Comment

So the champagne stays on ice, for now.  The pound very nearly reached my long awaited level of 1.25 when it touched 1.2492 at one stage on Thursday.  I'm getting a bit cocky now, and I think we might see the twin towers at 1.28.  That is 1.28 Euros to the pound and 1.28 dollars to the Euro.  There's a lot going on at the moment, and here is some of it:

 

Exit stage right

 

Hollande didn't win he presidential election, Sarko lost it.  Predictable really, for a leader who presided over the worst economic meltdown for decades.  A pity really; he was once seen as the French Thatcher, someone who would have the political strength to take on the unions.  Unfortunately he soon showed his true colours and his own interests outweighed the needs of France. 

The euro suffered heavy losses this week as fears surfaced that election results may have a marked effect on the makeup of the eurozone.  Fears that Greece could soon leave the euro and fears over the state of the Spanish economy gripped the market. The Greek elections raised doubts that the Greece would stay in the euro much longer as anti-austerity parties took over a great deal of power from the two main parties. To date, no coalition has been formed.  Another election in June is looking ever more likely which would mean that a coalition may be formed between parties who want to tear up the current austerity deal.  Italy also moved substantially to the left, potentially threatening their will to follow the austerity line.  With a series of countries rejecting austerity, why should counties such as Spain, Portugal and Ireland feel obliged to toe the line?  Watch out Euro.

 

Back on the farm

Merv and the team decided to keep the printing presses in mothballs this week, and also to leave the base rate unchanged.   A few pundits had believed that they would announce more QE.  Merv decided against any statement, which some view as controversial with the economy contracting and the MPC not coming up with any alternative therapy,  especially when fiscal tightening is being used at the same time.  With unemployment on the rise and private spending still at depressed levels, the BoE might be criticised for not doing enough to revive the economy.  Inflation is the coloured gentleman in the woodpile here, with fears that persistent inflation will lift wage  expectations,  hurting UK competitiveness. Inflation in March rose to 3.5% and price growth has not come down as rapidly as expected.  Household real disposable income shrank for the third year running, and without a substantial improvement here the recovery will be sluggish at best.   The pound likes this lack of QE though, and here we are at the highest level since the end of 2008. 

Other UK figures were a bit confusing.  UK industrial production fell by 0.3% from February to March, more than the market expected.   Manufacturing output however grew by 0.9%, well ahead of the 0.4% gain foreseen by analysts.  So much for statistics.