The pound broke three days of loses against the euro to register a 0.5% gain on the day’s trading following fresh concerns about the ability of the EU leaders to control the sovereign debt crisis afflicting the peripheral nations of the euro zone.
In another sign that the economic outlook for the UK may deteriorate in the months ahead, the British Chambers of Commerce (BCC) reported that the UK economy will grow by less than expected next year. The BCC downgraded its forecast for the UK’s GDP growth in 2011 from the 2.2% it predicted in September to just 1.9% blaming the euro zone debt crisis; austerity cuts; a weak housing market and the VAT rise from 17.5% to 20% planned for January 2011.
The BCC also expects the Bank of England to pump more money into the economy to stimulate growth in the UK next year, a process known as quantitative easing (QE). £200 billion has already been committed towards QE in order to boost the recovery in the UK. Even the suspicion of further QE will undermine the pound so the markets will be looking out for the announcement from the Bank of England at noon on Thursday.
On a brighter note for the UK economy, the Engineering Employers Federation (EEF) reported yesterday that the UK manufacturing sector is in rude health, thanks in large part to strong demand from overseas customers. Meanwhile, business group CBI has called manufacturing the “unsung hero” of the UK economy. The CBI also argued manufacturing is “well placed to lead the country’s recovery”. Last week, a closely watched survey suggested the UK manufacturing sector grew at its fastest rate for 16 years in November, with a record rise in employment in the sector.
The euro has come under pressure again as euro zone leaders continue to argue about how best to tackle the sovereign debt crisis. Some, like Jean-Claude Juncker, Luxembourg’s prime minister and chairman of the euro zone finance ministers group and Giulio Tremonti, Italy’s finance minister believe the euro zone should raise the financial safety net for its banks and create a joint government bond to reduce the borrowing costs of the peripheral euro zone nations which reached record high levels last week before the European Central Bank intervened in the markets buying Greek, Spanish, Irish and Portuguese bonds. Others, most notably Germany’s Chancellor Angela Merkel told a press conference in Berlin yesterday that she saw no need to boost the bailout fund, which is unpopular in Germany because of the size of the country’s commitment. She also dismissed calls for the single currency bloc to establish its own joint government bond.
With the Irish due to vote on their emergency austerity budget this afternoon, sentiment towards peripheral Europe continues to remain finely balanced and it may not be long before the stay of execution engineered by the ECB President, Jean-Claude Trichet last week sees the euro start to slide back.
Fed Chairman Ben Bernanke said that the Federal Reserve could end up buying more than the $600 billion in US government bonds it has committed to purchase if the US economy fails to respond or unemployment stays too high. He added that the Fed will regularly review the policy and could adjust the amount of buying up or down depending on the economy’s path. The US economy grew at a modest 2.5% annual rate in the three months ending September 2010 and more vigorous growth is needed to bring down unemployment.
The interview follows Friday’s worse than expected US employment report. The increase in the unemployment rate to 9.8% has fuelled speculation that there could be further QE or QE3, which seems a little premature given the Fed is only 1 month into QE2.
With silver reaching a 30 year high and oil a 26 month high on the commodity markets, risk appetite is making a comeback further boosting high yielding commodity driven currencies line the Australian dollar despite the Royal Bank of Australia’s decision to hold Australian interest rates unchanged at 4.75% and hinting that the next move on interest rates may be months away.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
