Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 12th of March.
German President Joachim Gauck warned against the fallacies of too much union in Europe, stating growing inequality among member states has generated a sense of unease and a sense of annoyance, leading to an increasing risk of national humiliation. Though Gauck remains pro-Europe, there is a need for debate on the future of the eurozone. Standing closer to greater integration, the Europeans seem to be hesitant if they should really undertake the onward journey.
As the Italian experience has showed, a closer union for ‘more Europe’ may be a political illusion. Stabilising the eurozone at this point would require an open-ended financial commitment and the EU is not politically prepared for such a measure.
Instead of pursuing more unity tentatively, this may be the time to restore sovereignty to national authorities in the currency bloc. This will give the Europeans a chance to regroup and prepare for a more closely integrated Europe.
To meet these objectives, the dysfunctional system of centralised fiscal governance must be dismantled and fiscal responsibilities must be returned to member states. The reason for such a measure is obvious; before the crisis, the over-emphasis on budget deficit of less than 3 percent of GDP led to serious abuse. Either it was openly flouted, as in the case of France and Germany, or data was fudged to hide the problems (a common practice across eurozone, not just in Athens).
When crisis stuck in 2008, the 3 percent deficit target became the focal point for austerity. EU leaders complicated fiscal governance further and created a maze of inefficient bureaucracy.
Also the case for returning fiscal governance to national authorities is strong. It is foolhardy to think that the citizens of distressed countries will not act responsibly since they are bearing the stress of fiscal burden. True the governments may succumb to fiscal temptations, but the current suffering is likely to defer citizens from future excesses.
The European integration has been a ‘falling forward’ process this far, with each fall serving as a lesson for a stronger union. While this can be a basis for declaration of good intentions, it may not inspire the nations to make profound financial commitments that will be required in future. Taking a back step, however, will give them an opportunity to ponder over the best course forward for a more resilient euro.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1445
GBP/US$ – 1.4904
GBP/CHF – 1.4136
GBP/CAN$ – 1.5302
GBP/AUS$ – 1.4486
GBP/ZAR – 13.6352
GBP/JPY – 143.54
GBP/HKD – 11.5392
GBP/NZD – 1.8065
GBP/SEK – 9.5410
EUR: The EUR/USD pair saw little action yesterday and overnight, trading in a narrow 30-40 pip range. It traded on either side of the 1.3000 level after French industrial production disappointed, coming in at -1.2 percent versus expectations for a 0.1 percent decline. German trade balance figures were also released and Berlin’s trade surplus came in at $15.7 billion against forecasts of $17.9 billion. Neither figures, however, had much of an effect on the single-currency and the euro managed to erase early losses to close back up above the 1.30 mark. Despite the poor figures, euro’s allure remained higher than sterling to investors and pushed the GBP/EUR pair down ever closer to 1.14. The GBP/EUR pair opens at 1.1455 this morning.
USD: The recent dollar momentum fizzled yesterday despite there being little by way of US economic data in the wake of positive US jobs figures on Friday. The better-than-estimated spurred speculation that the Federal Reserve could unwind its loose monetary policy sooner than expected. The EUR/USD pair has been comparatively steady over the past 24 hours and has traded around the 1.30 level. The GBP/USD pair is likely to continue its weak run due to the contrasting prospects for monetary policy from the Bank of England and the US Federal Reserve. Also the latest spate of strong labour data from the US is likely to keep the GBP/USD pair under 1.50 in foreseeable future. We have the UK manufacturing and trade balance figures due in the morning and any weakness could push the GBP/USD pair to new lows. The pound opens at 1.4902 against the US dollar today morning.
Have a great day!
