GBP on the march against the Euro
Week commencing Monday 5th March 2012
Overriding Market Themes
The pound posted its biggest gain versus the euro this year as the European Central Bank loaned a record amount of capital to the embattled regions banks, increasing the supply of money in the single market. The move, which saw GBP/EUR fly into the 1.20’s, was also helped along by Bank of England MPC board member Martin Weale, stating that inflation was likely to persist in the UK, reducing the need to expand the already massive asset purchasing program the bank operates. All this is good news for the good old pound, and certainly if the momentum can be maintained, the mid 1.20’s could be on the horizon.
In ‘Euroland’, all but two of the European Unions 27 leaders have signed up to the new fiscal compact, designed to enforce budgetary discipline within the bloc. Only the Czechs and the Brits remain outside the treaty, which should bring the zone one step closer to some form of bungled fiscal union. The road ahead for the Eurozone is long and hard, but the signing of this compact is a positive step in the right direction. Although critics argue that the fiscals treaty is merely a political gesture aimed at the German taxpayer, I feel that this may in fact help the bloc come out of this crises. We now have to hope that it gets through all 25 national parliaments before being signed into law! Who said politics was easy!
Across the pond, Bernanke has been at it again! US 10 year note yields rose on the back of his two day congressional hearing as he dampened down expectations that he would endorse a third round of asset purchases. He is in a good position, especially in the developed world, presiding over what is arguably the most impressive recovery in the west so far. US employers continue to post jobs, with an additional 200,000 workers finding employment in February. I must stress however, that amid all the positive and bullish news coming state-side, there are still warning signs to watch out for. Unlike Europe, the Americans are having difficulty finding their feet with regards to fiscal consolidation, with some states holding huge budget deficits. Almost more importantly however, politically the country is still stumbling to find a common economic stance between the democrat president and his republican senate. With Europe getting the bad press for so long, we feel it is only a matter of time before the spotlight shines over the Atlantic.
GBP This Week:
We will be watching for the Bank of England rate decision on Thursday, in addition to any murmurings of expanding the banks current quantitative easing program. Although we expect no change in base rate or the level of QE, we want to see how many committee members vote for a slight expansion in the QE level., if we see more than 2 (as seen last month) expect sterling to decline. The only other release of note is the GDP estimate on Friday, expected at -0.2% for February. Hopefully a positive figure will be released, which will certainly cement sterling in the 1.20’s for the short term.
We were negative on GBP last week, and although we saw some significant gains we still believe that there is room for some profit taking at these levels, especially on GBP/EUR.
USD This Week:
We have a relatively quiet week for the dollar with Non-farm payrolls and the unemployment rate being released on Friday. We expect the unemployment rate to remain flat over the month, however a slight decline in the number of white collar employment for the month. We are somewhat bullish on the US this week, and think we should see some retracement in EUR/USD from the euro’s gains last week.
EUR This Week:
On Tuesday, watch the EZ GDP release for the quarter and the year. We expect to see a quarterly contraction in GDP as the zone recovers from the Greek fiasco, and an overall annual rate of growth at 0.7%. Also, on Thursday we will learn if the ECB are looking to maintain rates at 1%, which seems likely.
Only other release of note is German CPI on Friday. We expect a flat figure with no gains or losses to be noted. We remain somewhat bullish on the Euro this week, and are looking for it to retake some lost ground against the pound as traders look to close out sterling longs and sentiment returns to the bloc.
In Other News:
Congratulations to Vladimir Putin, who smashed through the presidential elections and returning to office for a third time. Although there are rumours of foul play, I doubt that a victory on his scale can be engineered in such volumes, although I must confess I am the trusting type. In more local news, Rebecca Adlington qualifies for the Olympics at the British Swimming Championships. The Olympian will be joined by Jo Jackson, Ellen Gandy, Fran Halsall, Daniel Sliwinski and Craig Benson during the London Olymics this year, and all the very best to them all. The more I read about our sporting hopefully, the more I hope to see the UK back in the top three on the medal board.