Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 8th of May.
The popular “growth compact” has caught the fancy of Europe after people started showing signs of austerity-fatigue. That propelled the socialist leader Francois Hollande to French presidency. Apparently, ECB chief Mario Draghi is also backing the idea. That gives the idea a great deal of legitimacy given Draghi’s fixation with austerity measures for deficit cuts. The latest to jump the bandwagon is European Commission’s top economist Ollie Rehn who indicated an easing up of austerity over the weekend and argued for an agreement to boost investment.
However, for this new effort to be successful, politicians need to continue with long-term reforms, namely labour, welfare and banking. Loose monetary policy or less stringent austerity measures in the short-term should be supplemented with long-term measures to boost growth. There has to be perceptible changes for all the European countries and not only for the members facing crisis. For example France must rebalance its economy by reducing public expenses which currently contributes 57 percent to the GDP. Even the uncompetitive German services sector stands to benefit from these measures. Credible plans to restore competitiveness and reduce deficit gaps need to be implemented. While investors may not be happy with growth-crushing austerity measures, they are unlikely to reward fiscal profligacy either.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2412
GBP/US$ – 1.6159
GBP/CHF – 1.4914
GBP/CAN$ – 1.6072
GBP/AUS$ – 1.5890
GBP/ZAR – 12.642
GBP/JPY – 129.062
GBP/HKD – 12.5402
GBP/NZD – 2.0391
GBP/SEK – 11.041
EUR: The single currency dropped sharply against the greenback on Friday after non-Farm payrolls missed estimates. Also, with the French and Greek elections looming over the weekend, the added political uncertainty ensured risk remained off the table, softening the euro further. The euro economic zone continued to disappoint with the French and Italian service sector PMI coming below expectations. Rumours went around in the later half about bailout discussions between the Spanish banks and the European Central Bank, pushing the euro further down. The GBP/EUR pair remained flat for most of the day, but rallied towards the end, settling just short of 1.2350. The political developments over the weekend continue to keep Europe on the edge. The GBP/EUR pair opens at 1.2415 this morning.
USD: The much-anticipated non-farms payroll on Friday came as a big disappointment with the world’s biggest economy adding 115,000 jobs in April. The number, though the weakest in 6 moths, was good enough to push the unemployment rate down to a three-year low of 8.1 percent. Some analysts however, contributed this to many Americans stopping job search altogether. The QE3 chatter, quite expectedly, grew stronger. The dollar initially softened against the Sterling on weak data, only to rebound later as equity, oil and bond yields tumbled. The GBP/USD pair closed at around 1.6142 despite hitting 1.6200 in early trade. The poor Q1 GDP may force the Bank of England to extend its assets-purchase program £25-50 billion when the MPC meets this week, according to some experts. The Pound opens at 1.6146 this morning.
