Sterling remains flavour
of the month
Sterling has climbed by a further three cents against the
euro in the past fortnight. Sterling’s progress against commodity currencies
such as the AUD, NZD, CAD and ZAR has been ever more
impressive in the past few months. Sterling has climbed by over 10% against the
ZAR and NZD since mid-Feb, while it has advanced against the ZAR by the same
margin since mid-March.
Sterling’s safe-haven status is behind its demand and this
is not something we see disappearing any time soon. Also helping the pound was
last week’s MPC vote against further quantitative easing. Whilst there will be
some nerves surrounding the voting pattern (to be revealed by the MPC minutes
next week), stubbornly high inflation seems to be of greater concern to the
policymakers (thus making more QE harder to justify). Tomorrow’s Quarterly
Inflation Report from the Bank of England will be highly relevant in this
regard. A firmer inflation outlook is likely to be provided, which again should
be broadly supportive of the pound.
Euro suffers from lack of
Greek coalition agreement
Global
investor confidence and risk appetite has taken a turn for the worse in the
past fortnight, driven by concerns over Greece. Since the failure of the ruling
Greek coalition to maintain sufficient votes at its recent election, major
doubts have arisen as to whether Greece will remain within the euro. Coalition
talks have collapsed and another election will be held in mid-June, which means
the current uncertainty will be extended. As a result, Spanish and Italian bond
yields are on the rise, with the former’s 10-year debt yields looking
particularly alarming at fresh 2012 highs over 6.25%.
Should an anti-austerity coalition government surface from the current mess, then
Greek bailout funds would be withheld, leading to default and a probable Greek
breakaway. The knock-on effects in the eurozone and the global financial system
as a whole are expected to be more drastic than those of Lehman’s collapse. It
is no surprise then, that the euro has suffered a significant decline, with
perceived safer-currencies such as sterling and the US dollar filling the void.
GDP data
out of the eurozone was very mixed indeed this morning. Italy broadly stuck to
the script by contracting by 0.8% in Q1 of this year, while French growth
remained stagnant. However, the German economy grew by 0.5% in Q1, which helped
the eurozone economy as a whole avoid a technical recession by posting a 0.0%
GDP figure. This development has given the euro a mild boost today but with so
much austerity still to be delivered in the eurozone and today’s
forward-looking economic sentiment surveys showing a fairly sharp decline,
eurozone growth is highly likely to return to negative territory this year.
End
of week forecast
| GBP / EUR | 1.26 |
| GBP / USD | 1.5950 |
| EUR / USD | 1.27 |
| GBP / AUD | 1.61 |
Sterling is trading at €1.25 today, which represents near
enough a three and a half year high. We are not calling a top to this pair’s ascent
just yet either, with nerves surrounding Greece likely to deteriorate over the
coming weeks. In risk averse conditions, the pound has understandably traded a
little softer against the US dollar, coming off its highs of $1.63 to trade two
and a half cents lower today. This pair could well test the $1.60 level fairly
soon, though we are not anticipating any major collapse.
Sterling’s rally finally comes to a halt » « May 2012 Outlook Report: Sterling flying high
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