The euro continued to rebound against the pound and US dollar on Friday as the markets took comfort from Thursday’s European Central Bank action in increasing its purchases of bonds from the peripheral euro zone countries and the words of the ECB’s President, Jean-Claude Trichet. After starting the week on the back foot with the markets highly skeptical about the very survival of the euro, borrowing costs for the peripheral euro zone countries like Portugal, Spain and even Belgium and Italy have reduced substantially.
Against the pound, with a host of economic data suggesting a much tougher first quarter of 2011 for the UK economy, we may well see the euro continuing to retrace from its recent lows.
The British Chambers of Commerce reported yesterday that the UK economy will grow by less than expected in 2011. This follows the recent report from the Office for Budget Responsibility (OBR) which downgraded its 2011 growth forecast from 2.3% to 2.1%. The BCC was even more bearish, suggesting year on year growth will slow from 3% in the final quarter of 2010 to 1.4% in the second half of next year.
But it said the economy was sufficiently robust to avoid slipping back into the so called ‘double-dip’ recession and it was more upbeat moving forward because of private sector growth. It upgraded its GDP growth forecasts for 2012 from 1.8% to 2.1%. That however, is still significantly lower than the OBR’s 2.6% estimate.
The BCC, which represents hundreds of small businesses, also reduced its unemployment forecast for the second half of 2012, estimating the number of people out of work to fall by 50,000 to 2.6 million.
In a further boost to the risk sentiment currently sweeping the financial markets, the price of oil on both sides of the Atlantic hit its highest level on Friday since the financial crisis. In Europe, Brent crude futures rose to $91.58 per barrel, while in the US, West Texas Intermediate hit $89.35.
Despite the market rally, prices still remain 40% below their pre-crisis peak. Among the factors driving prices higher are rising demand because of the global economic recovery and cold weather in Europe, as well as the weak US dollar.
This should continue to boost the high yielding currencies like the Australian, New Zealand and Canadian dollars and South African Rand and reduce investors appetite for the safe haven attributes of the US dollar.
