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EUR falls further

EUR falls further

It’s been an eventful long weekend, with Spain’s credit downgrading, the first (but no doubt not the last) resignation from the coalition government, and the latest tension in the middle east with Israel boarding a humanitarian ship which was attempting to break the blockade around Gaza. Although the markets were closed yesterday in the UK and the US, European markets were still open, and as you would expect trading was thin; this has given some time for Sterling and the Euro to recover from dips caused late Friday after Spain’s downgrading. The rating agency Fitch downgraded Spain one notch from their AAA rating, mostly on the back of a lower growth forecast for the coming year, and as Spain is the Eurozone’s fourth biggest economy, the ramifications of trouble for Spain far outweigh those for Greece. Of course Spain is nowhere near Greece’s position just yet, Greece’s bonds are rating as junk status, but the downgrade is a worrying sign.

The news of Spain’s downgrade did originally harm both Sterling and the Euro, however mixed news from the Eurozone, with Trichet insisting the Euro was still a ‘credible currency’ and had held it’s value well, while at the same time the ECB warned that Eurozone banks still face potentially €195bn losses from more loan write downs over the coming 18 months. The Euro has failed to recover much of this lost ground and is currently below 1.22 against the Dollar. The Pound has managed to hold relatively steady against the Dollar, shrugging off the problems with the coalition government to hold in a range between 1.4450 and 1.4550.

It’s only taken three weeks for the first problems to start to show in the coalition government, and it is the Liberal Democrats who have stumbled. The Lib Dem’s seemed to come out of the expenses scandal relatively clean, although that now seems to be due to the low level of scrutiny they were put under rather than any different standards of behaviour. As the Lib Dem’s are now a junior partner in the government their ministers have come under the spotlight and the first to be found wanting is former Chief Secretary to the Treasury David Laws, putting aside his irrelevant personal life (it wouldn’t be a British scandal if it didn’t involve some sexual conduct dimension) there are 40,000 reasons for his resignation, and his immediate replacement, Danny Alexander, also for the Liberal Democrat party, has already come under a bit of fire for jumping through a tax loophole which allowed him to avoid paying capital gains tax on his property. Alexander hasn’t broken any rules, but his behaviour is still considered a cynical use of the benefits given to MP’s, it may not be enough to force him out of office, although it is enough to cast a stain on the start of his treasury career. It may be that the honeymoon period may already be over for the coalition government, something that will no doubt be confirmed when the drastic cuts that are needed, are outlined in this month’s budget. As already stated, the Pound has managed to shrug of the political scandals for now, and it has managed to take advantage of the Euro’s continuing problems rising to just under 1.19 in this morning’s trading.

As always in the first week of the month it’s a bumper data calendar with the usual PMI’s for the UK and the Eurozone with the week finished off by the US non-farm payrolls. The data starts today with UK PMI’s for manufacturing, and these have come in steady at 15 year highs, roughly in line with forecasts however the devil is in the detail with signs of higher price pressures in the sector which does not bode well for the BoE’s forecast of lowering CPI in the medium term. Later today we have Eurozone PMI for manufacturing and the US ISM manufacturing index, both are expected to fall slightly but still remain at elevated levels, which should give the Pound some support, indeed it has already risen past the 1.19 level this morning

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