Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 16th of January.
European leaders, particularly European Commission President Jose Manuel Barroso and his counterpart Herman Van Rompuy, often argue that Europe must integrate economic governance to defend its social model. It is not been clear though how more integration will help more integration will save the European social model from the onslaught of emerging markets.
To begin with, Europe doesn’t have a uniform social model and the socio-economic indicators are as varied as anyone can think of. However, the two main problems confronting Europe, an ageing population and a slowing economic growth, can be addressed at the European level. An ageing population is a function of low fertility and can’t really be addressed by government action
European economy is rather open for its size since exports contribute to about 20 percent of GDP, compared to just 12 percent in the US. Though the emergence of big economies like China is bound to have a bigger effect on the region, and this can happen if they are more important as competitors than they are as customers, it doesn’t seem to do more harm to the economy since European export rate is fairly high compared to the US.
The EU has managed to hold its market share rather well against competitors like China and has outperformed other developed economies like the US and Japan. True, each member country had to adapt in its own way to remain competitive, knowing fully well they can’t bend the rules of the game in their favour; the gains made by economies like Germany far outweigh the losses of economies like Greece.
The future to Europe’s prosperity lies in ensuring faster growth. But it remains hazy how greater integration will improve the situation. The impediments to faster growth are well known and if it were politically easy to accelerate growth, it would have happened long ago.
Politicians across the region have a tendency to blame Brussels for every malaise that afflicts them, thus creating an impression to domestic audiences that economic affairs could be better managed without EU interference. This means preaching more integration at the European level, but portraying it as an obstacle to growth at home. This doublespeak has led to loss of credibility for both the politicians and the EU institutions. More integration to save Europe’s social model is irrelevant while deeper integration that would really save the eurozone is tacitly opposed by the local politicians.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2065
GBP/US$ – 1.6016
GBP/CHF – 1.4922
GBP/CAN$ – 1.5802
GBP/AUS$ – 1.5174
GBP/ZAR – 14.1981
GBP/JPY – 141.34
GBP/HKD – 12.4175
GBP/NZD – 1.9083
GBP/SEK – 10.4402
EUR: The single-currency reversed its recent gains against the USD and sterling yesterday after German GDP growth came in at 0.7 percent for 2012, much lower than the 3 percent rise witnessed in 2011. The Federal Statistics Office said the economy may have contracted 0.5 percent in the fourth quarter of 2012 and slashed its growth forecast to 1 percent for 2013. Euro came under further pressure after Eurogroup President Jean Claude Juncker said the euro exchange rate is still dangerously high following the common currency’s recent spate of gains. The EUR/USD pair opens at 1.3285 this morning while the GBP/EUR pair starts the day at 1.2096.
USD: The USD remained fairly range-bound against the pound while weakening against the euro yesterday. US retail sales, which showed a growth of 0.5 percent against expectations of a 0.2 percent rise, helped support the greenback later in the day which was on the back-foot against the euro. Other data released included the Producer Price Index reading which showed prices fell 0.2 percent in December. The GBP/USD pair traded in the 1.6035/1.6100 range amid threats of a downgrade of the UK economy by Fitch. At the same time Fitch warned that a delay in lifting the debt ceiling will result in a revision of the AAA rating of the US economy too. We have the Core CPI data due from Washington today while the UK economic data calendar is relatively light on the ground with no important numbers due for release. The GBP/USD pair opens at 1.6035 this morning.
Have a great day!
