Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 26th of July.
The world’s advanced economies are stuck in an endless debate whether prudent fiscal policies or reduced budget deficits should be implemented for recovery. Those that argue for moral hazard and long-term sustainability label it “discipline” while those concerned about shrinking effects on the economy call the second option “austerity.”
The debate however, seems misplaced since it’s akin to ask if its better for a driver to turn right or left since either of the option is appropriate, depending on the location of the car. Governments should run deficits when in recession and economies should run surplus when in boom. Keynesian macroeconomic policies lost its relevance because governments often mistimed countercyclical fiscal policies; initiating fiscal stimulus when the recession was over. However, it’s certainly better than to follow a destabilising fiscal policy that destabilises the economy by increasing tax cuts and spending at the times of booms and hiking taxes and reduce spending in response to slowdowns.
Pro-cyclical policies worsen employment and output losses during recessions while helping in asset bubble formation and inflation during booms, thus amplifying swings in business cycles. Yet much of the developed economies on either side of the Atlantic precisely do the same. Fiscal prudence takes a backseat during the boom years while tax hikes and spending cuts are prescribed when the tide has turned.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2736
GBP/US$ – 1.5486
GBP/CHF – 1.5434
GBP/CAN$ – 1.5718
GBP/AUS$ – 1.4982
GBP/ZAR – 13.0195
GBP/JPY – 121.03
GBP/HKD – 12.0129
GBP/NZD – 1.9546
GBP/SEK – 10.7701
EUR: The single currency gained some traction against both the GBP and the USD after ECB Governing Council member and Austrian economist Ewald Nowotny said the region’s permanent bailout fund, the European Stability Mechanism could be given a banking license despite a softer-than-anticipated German IFO number. A banking license would enable the ESM to tap the European Central Bank for funds, giving it more firepower to stave off crises from bigger economies like Spain and Italy. The borrowing costs for Spain and Italy came down after Nowotny’s statement hit the wires, giving some relief to the governments of the beleaguered nations. The GBP/EUR dropped to a one week-low of 1.2728 by afternoon following a weak preliminary Q2 GDP number, putting a question mark over the cable’s ‘safe-haven’ status. The tier1 economic news calendar is weak on the ground today and developments in Europe will decide the common currency’s movement. GBP/EUR opens at 1.2758 this morning.
USD: Yesterday’s first iteration of Q2 GDP number caught analysts’ off-guard as the British economy contracted three times faster than projected. Sure, there were one off events such as heavy rainfall in recent months; still the reading reminded the significant challenges policymakers face in getting the economy back on track. Though the cable recovered from the under-1500 level despite some strong headwinds during the US session, overnight it slipped back to yesterday’s low of 1.5458. There’s little tier-1 economic data due from the UK, but we have jobs and housing data from the other side of the pond. The GBP/USD pair opens at 1.5482 today morning.
Have a great day!
