Euro Falls, Sterling……

The Euro has taken a nosedive overnight and those of you with sterling would have been licking your lips this morning. However, with sterling also on the ropes, kick starting your computer this morning will have been very disappointing. Investors, rather than risking sterling investment, are choosing to pump their money into well-known safe haven currencies such as the Yen, Swiss Franc and once again the US Dollar. Therefore sterling, for now, continues to be the dead duck…

Pound Sterling – UK Markets

Although sterling has gained slightly against the euro, don’t be fooled into thinking our nation’s currency has climbed out of its trough. In fact, as of GMT 09:30 a combination of poor retail figures, negative consumer price index data and house prices that suggest UK growth has well and truly hit the wall, has indeed demolished sterling in minutes. Across the board, sterling is seeing red with markets dropping quicker than a lead balloon. Following the Royal Wedding we predicted that retail sales throughout the year would reflect consumer confidence, which at present is incredibly low. We are not spending, the government is enforcing six years of crippling spending cuts and inflation isn’t being reflected in wage increases. Yet we are expected, as an economy, to grow. Perhaps we are being slightly ill-informed, but it’s tricky to see where growth is likely to occur.

US Dollar – US Markets

With just three weeks to go until the US reaches its debt ceiling, President Barack Obama is facing an uphill battle - not only with time, but also with the Republicans. Obama is arguing the need for a broader package of spending cuts and tax increases to put the US back on track. The only issue standing in the way is a mere $2.3 trillion of cuts which the Republicans are refusing to give in to. Although, on the face of it, a default could be the likely option - similar to Greece - it will not be allowed. The possible outlook for this saga goes like this: we will continue to discuss this up until D-Day when all of a sudden, if by some miracle, there will be an agreement whereby the debt ceiling is raised. Whilst we may get slight Dollar weakening in the wake of this, long term the US Dollar has regained its footing as a safe haven currency.

Euro – European Markets

Finance ministers in Europe appear to have taken a hard stance on the growing debt issues in the Eurozone. With no action being taken the euro is very vulnerable and, because of this, has fallen to a 4-month low versus the Yen. Furthermore, the single currency is now trading below the 1.40 level versus the US Dollar. New IMF Managing Director Christine Lagarde appears to be taking a hard stance, stating that a second Greek bailout is not being discussed and that “nothing should be taken for granted”. With Italy and Spain now also on the agenda it appears the euro will struggle going forward. However, having been in this position many a time before, who knows? All we do know is that the IMF is now taking a much firmer stance and even if they were to agree on a Greek deal now, rising trends in Spanish and Italian yields would persist on the back of poor growth.

Other Currencies – Highlights

Take a trip down under and you’ll notice that the Australian and New Zealand Dollar have both fallen to two-week lows, amid concern the global recovery is stalling. Wearing the tag of currencies linked to growth this comes as bad news to the Aussie and Kiwi. So long as concern remains over a bailout in Greece risk aversion strategies will be in place, giving way to negative sentiment towards currencies linked to growth. The Brazilian government’s attempts to stem the currency’s continued appreciation appears to be working, as the central bank stepped up its US Dollar aversion strategies. Going forward, policy makers will continue to insist banks make non-interest bearing deposits with the central bank, that include a high percentage of short dollar positions.