Over a week after the election and some may have thought that the markets may have died down a little by now. We had an extended period of volatility after the election due to the hung parliament and the inevitable haggling afterwards, and although the coalition that formed was the markets preferred option, the Pound has failed to hang onto the gains it made shortly after the Lib/Con government was formed. One reason for the dip has been the reduction in risk appetite due the problems with the Eurozone, but the same problems are impacting on the Pound also, and although the UK is unlikely to have it’s debt rating reduced, the austerity measures that will be announced are going to hamper growth, even if they don’t cause a double dip recession. As it seems the Eurozone and the UK are going to have lower growth than most of the rest of the world the Pound and the Euro have suffered. Sterling has fallen down to below 1.4550, a long fall from 1.50, a level we saw just this Wednesday.
The Euro has fallen to a fresh 14 month low against the Dollar, depressed not just by fears that austerity measures are going to drag on growth, although the recent 0.2% GDP growth reading doesn’t help, but also that the ECB are going to start quantitative easing. The ECB are buying up government bonds, but unlike the UK and the US, they are issuing other bonds to pay for the purchases, which means they are not inflating the money supply. However both the UK and the US started out this way and, due to size of the schemes, switched to buying bonds by issuing new money. If the ECB did start issuing new money it would be even more problematic for the Euro than the UK scheme proved for the Pound, as the BoE only bought triple AA rated bonds, while the ECB are currently buying up bonds issued by Eurozone countries, including the bonds issued by Greece which have been determined to junk status by the ratings agencies.
The ECB is unlikely to start QE anytime soon, but that isn’t helping the Euro, and if the Euro breaks through the important psychological and technical level of 1.25 against the Dollar, it could slip all the way down to 1.20. The Pound hasn’t managed to make any headway against the weakening Euro, and has in fact declined to below 1.1650, from a high above 1.1750 yesterday. Although the UK is not part of the Eurozone it is part of the EU, and is therefore enmeshed in the bailout plan, while also sharing some of the same fiscal deficit problems itself. If the new government can assure the markets that the fiscal deficit will be cut, without harming growth too much then, the Pound should be able to take advantage of the Euro’s weakness.
There is no data out today from Europe to give the Euro or the Pound any support, so traders attention will be focused upon the US and this afternoons release of retail sales and Industrial Production. The outlook for industrial production doesn’t look good, with the previous restocking seemingly over the figure is expected to show limited growth. Retail sales are expected to come in a bit higher, not as high as last month’s bumper 1.6% increase, but a more sustainable 0.4%. A good figure here might help lift some of the week’s anxiety and may offer the Pound a little boon as risk appetite gets a leg up.