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Euro responds positively to Spain’s budget reforms

Euro responds positively to Spain’s budget reforms

European markets responded positively to Spain’s plan on budget and reforms .The plan featured on 8.9% cut in government spending in 2013 and increase in sales tax income by EUR 5b to EUR 175b. Also, a new independent budgetary authority would be established to monitor government spending. The overall target on deficit to GDP ratio would be 4.5% comparing to 2012’s 6.3%. The Deputy Prime Minister emphasised that,” this is a crisis budget aimed at emerging from the crisis. In this budget there is a larger adjustment of spending than revenue”.

Meanwhile, the unemployment rate in Germany remains near to its lowest level at 6.8% since German reunification more than two decades ago. Higher jobless figures could become a challenge for German Chancellor Angela Merkel, who faces an election next year, and may reduce the willingness of average Germans to continue to bail out southern euro partners like Greece.

The better than expected British economy data lifted hopes in the market supporting the pound and share prices. The economy shrank by 0.4% in the April-to-June period as initially estimated a contraction of 0.7% by ONS. However the UK economy still has a tough job in developing significant sustainable growth, given tighter fiscal policy, still-significant pressures on consumers and soft global growth. More stimulus from the Bank of England remains highly likely in the fourth quarter.

On the FX markets, the euro has climbed against the dollar and  the sterling. The GBP/ EUR is currently trading at a range of 1.2543 – 1.2583 and  GBP/USD is trading at a range of 1.6227 – 1.6272 .

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