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GBP up vs EUR down vs … everything else

GBP up vs EUR down vs … everything else

With the election over and the make up of the government finally decided, the news media has turned back to it’s previous obsession, the ash cloud, grounded flights and the BA strike. The new government have already started to talk about cuts, wasting no time in blaming the previous administration for excessive spending, and it looks like we may have some concrete cuts announced today, long before the emergency budget scheduled for sometime next month. The government’s austerity measures are a necessary step to reassure the markets that the deficit will come down, even though any changes will take some time to work themselves through to the government figures. The Pound may gains some support from tough talk, long before actual spending cuts make any difference.

Over the weekend the Euro has continued to slip, as rumours that France’s rating was under threat (rumours that were later denied), and the spending cuts announced by both Spain and Portugal that will create a drag on Eurozone growth, weakened sentiment. The cuts are of course necessary to reduce deficits, and the markets may actually be more nervous about the crisis due to some of dramatic language coming out of EU officials, with Angela Merkel claiming that the future of the EU was at stake, while the ECB member Weber said it was important not to underestimate the dangers to financial stability. As both comments are from Germany, the rhetoric is strong to try to sell the deeply unpopular financial package at home. Whoever the comments were directed to they still spooked the markets and the Euro has slipped to below 1.2250 against the Dollar in overnight trading, a lower level than we saw throughout the previous crisis caused by the Lehman collapse, and a level not seen since 2006. Despite the hysteria, the existence of the EU may not be at stake, the reputation of the Euro is, and questions are being asked about it’s viability as a reserve currency.

The Pound has shown some strength against the Single Currency, climbing back above 1.17 this morning. Against the Dollar the Pound has been suffering, due to a combination of risk aversion caused by the Euro meltdown, as well as better than expected US retail sales and Industrial production figures. It has been a volatile night for the Pound against the Dollar, which has seen it slip from 1.4550 to almost 1.4250, a level not seen for over a year, then push back above 1.44 this morning. The Austerity measures may give the Pound some long term support, and although the UK economy may outperform the very weak Eurozone, and even then only just, it will be a hard road back against the Dollar with the US economy coming out of the recession the strongest of the major developed worlds economies.

Osbourne has just finished his speech, and as expected they announced a independent forecasting body to supply the Treasury with accurate forecasts, something which was always suspect with the previous Chancellor Darling using predictably optimistic growth figures. The Chancellor has also announced that the emergency budget will be held on the 22nd of June, a day before England play Slovenia in the world cup, perhaps he is hoping a strong win the next day will distract from some unpopular tax rises and spending cuts. Osbourne has announced little else, so the markets will have to wait until tomorrow’s CPI figure for any UK news. There is some data out in the US this afternoon, but once against the Euro problems will dominate the markets, which may leave the Pound vulnerable to the Dollar, but supported against the Single Currency.

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