In the last seven days the pound covered most of its cent-and-a-half range four times, with seven noticeable changes of direction. The overall result was the same as it had been in the previous two weeks; no net movement for sterling against the euro.
Although the market has not exactly stunned itself into inactivity – exchange rates are still moving – investors are suffering from crisis fatigue. They have been exposed to EU political dithering for so long that they have lost the will to panic. More recently, an outcome to the negotiations surrounding the controlled default of Greece has been just around the corner for several weeks. It still is, or so those involved in the discussions promise, but the coin is still spinning. Until it comes down on one side or the other there is no way of knowing whether there will be an orderly rescheduling or a disorderly default.
Similarly with the threat of “contagion” in southern Euroland, summit meeting after summit meeting has failed to deliver anything remotely akin to Action Today. The latest wheeze – the fiscal compact that the German chancellor believes will restore investors’ confidence in Italy, Spain, et al – will take years to have an effect. It might even lose the support of France if François Hollande replaces Nicolas Sarkozy as president this summer; M. Hollande’s manifesto includes hiring 200,000 public sector workers and lowering the retirement age, hardly a recipe for reducing the nation’s debt.
The European Central Bank is doing an admirable job, handing out money to banks as though it is going out of fashion, but Euroland leaders are perceived to be doing nothing. David Cameron tried get them moving in his address to the World Economic Forum in Davos with a call for “bold and decisive action”. He said the three things they must address this year are “Greece, banks and firewall”. But his words met with more sympathy among investors than they did in the euro zone corridors of power.
Britain’s prime minister has problems of his own though. Whilst the chancellor’s cost-cutting is having a visible effect on reducing the deficit, it is doing little to help the economy. Provisional figures released this week showed just 0.8% growth in gross domestic product in 2011. The output actually shrank by -0.2% in the last three months of the year. And Britain is likely to be saddled with that difficult trade-off for years to come. Bank of England Governor Mervyn King said as much in a speech on Tuesday; “the path of recovery is likely to be arduous, long and uneven”. But he said it would all be alright in the end; “There is no reason to despair”.
So the game goes on. One day the euro is hot, the next it is not. Since before Christmas the sterling/euro exchange rate has gone precisely nowhere. Against that track record it would be presumptuous to expect it to go anywhere in the coming week.
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