Both Sterling and the Euro had a poor day yesterday falling below 1.54 and 1.31 respectively against the US dollar. As we go into the Christmas period is seems like there is less and less positive data out for either region and investors will not want to be holding either over the Christmas break. Today is the last day of data before Christmas and one of the last in the year although it is primarily US data so again, little to help GBP and EUR.
This will be the last morning note until the New Year so I thought I would look a little further ahead to what next year may bring. Starting with the USD and much of the greenbacks losses or gains recently seem to be more about risk aversion than anything else, looking back 6 months and the US seemed to be struggling against its European counterparts. The recent problems in Europe have ignited that risk aversion once again and given a massive boost to the USD. There is no doubt still problems across the pond that are always on investors’ minds like the lack of urgency in dealing with the public deficit but the US will most likely continue to be a safe haven currency when things look bad in Europe.
There is still a possibility that the Euro may at least lose some of its members at the lower end, like Ireland of Greece. If the Euro lost some of the struggling counties it would most likely seem a lot more attractive. Less likely but still possible Germany could decide it did not want to support these struggling nations anymore. Although Germans may feel they are propping up the Eurozone, were they not part of the euro then their exports would be nowhere near as competitive and they may struggle with a very high currency like Japan has had recently.
Finally Sterling and the UK have got plenty of problems of its own. The first 3 months of next year will be crucial, will the austerity measures work, will they push us back into recession, will the deficit actually come down as fast as the coalition government expect it. Any data out that can give a clue to what the Q1 2011 GDP figures could be will be closely watched. The first half of 2011 is when many economists, including our own, expect the BoE to start raising rates and if inflation continues to be a problem the MPC may be forced to tackle it with higher rates. Sterling should get a boost from the higher rates when they finally appear.