Is The Euro Out Of Danger Yet?

This week opens with Euro volatility and the news that the Irish rescue package has been signed in Dublin over the weekend. Several EU politicians have spoken out to try and present this as a means by which calm and stability will be brought back to the Euro as any further impact of Irish debt on its trading partners and the rest of the Europe has been curbed. But is this really the case? The run up to the actual signing of the deal throughout last week took place amid protests in Ireland, and deepening political problems with calls for an earlier general election. One of the foremost problems is that Ireland’s ruling coalition have a very thin majority and the date of the Irish budget is looming on December 7th. Even though the deal for European rescue funds has now been signed therefore, there are some questions over how easily the Irish budget cuts will get passed, coupled with the fact a brand new Government might be in place early next year, who may unpick the conditions of the rescue package. The Euro therefore found itself under intense pressure over the course of last week falling 3.3 percent against the Dollar and 1.2 percent against the Pound. The position at the start of this week is a little uncertain – it has lost more ground to the Dollar but began rising on the Pound over the weekend. It is likely that markets are weighing up the issues with the Eurozone and whether or not this deal is enough to reinstate confidence in the Euro. There is also the problem of the other European nations with rising debt and borrowing levels. Portugal is coming under increased scrutiny and being tipped as the next nation that might need a rescue package, despite the denial of officials at present that this will be needed – this is a familiar tune heard from Ireland however and the EU have proved that they now have the authority to insist on nation’s receiving rescue packages to protect the overall interests of the Euro area. Any news coming from US and UK markets has been largely overshadowed as the European situation, as well as the problems in Korea, have been kept in the limelight. The US Dollar has typically benefited from all the economic and political uncertainty as the world’s largest safe haven currency and the Pound has therefore lost out to the US Dollar over the course of last week as a result. The on track UK GDP figures helped Sterling in its rise on the Euro last week but it seems to be starting the week on a vulnerable footing given its drop against the Euro – a drop in UK mortgage approvals and house prices have kicked off the week on a negative. Sentiment about the UK economy may now start to see a general shift. With the hype over the soaring third quarter GDP figures and higher inflation over, there are key areas of the economy such as housing that are failing to recover. The VAT rise of January will in all likelihood add to this Sterling fragility with an interest rate rise by the Bank of England being one of the only steps that could perhaps push Sterling significantly upwards as we move into 2011.