This weeks look at the euro and the pound with currency expert Keith Spitalnick

Hola amigos,

Outlook for April

Like March, April will be animated by the Greek sovereign debt issue and uncertainty about the UK election.  The current level of the pound is a result of foreign investors speculating as to the next likely phase of the crisis, and it appears that all they are finding are new reasons to sell the euro.

Greece, Spain and Portugal

The sentiment of many economists is that aggressive fiscal tightening by Greece, Spain and Portugal are likely to plunge their economies back into recession, in which case we could see a change in approach from the ECB with the loosening of monetary policy.

Greek central bank

Greek central bank Governor George Provopoulos said he’s confident the government will meet its “very ambitious” deficit-reduction goals and ward off any further credit-rating downgrades, but both Moody’s and Standard and Poor’s credit were still threatening to cut Greece’s credit rating during March.  Rating agencies want evidence that the plan is implemented on target and some time will need to elapse before they can form a better judgment.

European leaders continue support for Greece

European Union leaders’ continued pledge to support Greece’s efforts to control its finances helped fuel the pound’s sharpest drop since July as more investors became convinced that ECB President Jean-Claude Trichet would keep borrowing costs low.

Speculators, undoing of the pound

Strategists argue that Greece highlights fiscal imbalances that will lead to the currency’s (euro) downfall.  This is offset by an assertion made by some key British investors and the EU commissioner himself who has argued that speculators may be the undoing of the pound, and with early March’s Euro improvement to 0.8951 the pound is clearly threatened by this political uncertainty.

UK budget

This week we have the UK budget which is expected to be largely political but could lead to some surprises for Sterling.  One outcome that could be a boost for the pound is the potential for Alistair Darling to announce that the UK’s projected borrowing needs will be lower than forecast.  This would be a welcome relief for the markets and for the pound.  However outside of this uncertainty on who will be in power will undoubtedly keep a lid on any sustained sterling buying.

For now the pound is nestled nicely above 1.10 and has tested the 1.12 level last week.  It is critical that the pound remains above 1.10 to consolidate for a move higher.

Hasta la proxima!

For more information on currency exchange you can click here.

Here is this weeks update from currency expert Keith Spitalnick.

Those hoping 2010 would signal a return to global growth have been in for a rude awakening. We are still in the first quarter of the year and the currency markets are clearly worried by what they see. The US$ has been the winning currency so far this year appreciating nearly 10 % against a basket of currencies. Despite the fact that the US economy is still on extremely shaky ground and President Obama has even managed to increase the US debt by at least a trillion dollars since coming to office, the US dollar has rebounded as the rest of the world fret about problems in the Euro Zone and the increasing debt burden the UK has to service.

2010 was always going to present problems to the 16 members of the euro zone as the European central bank(ECB) signalled in late 2009 that they would no longer be able to borrow unlimited funds at historical lows rates of interest, basically free money, and they would have to balance the books in their own respective economies. Well it didn’t take a genius to realize that some of the more indebted euro zone members would struggle and the first but certainly not the last to emerge on the critical list is Greece.

Ultra low interest rates

The problem is that for the previous 10 years euro zone members had enjoyed ultra low interest rates and very little regulation from other member states .The domestic populations have been supercharged with debt and now they cannot afford to repay it. Now here’s where the European dream starts to fall apart, as other member states are reluctant to bail out each other as the political pressure mounts from their own populations who cannot see why their taxes have to go to pay other nations’ debts. Therefore the only choice Greece has is to bring in austerity measures that so far have resulted in violent protests on the streets of Athens. Greece will not be the last country to go through this struggle but while it goes on the Euro will continue to fall especially against the US$ and Japanese yen.

The UK has so far managed to convince the markets that its debt burden is manageable but time could be running out and here’s why. Between 1997 -2007 the UK borrowed £30 billion a year. In 2009 they borrowed £150 billion, 2010 was £200 billion and for the years 2011 out to 2015 £150 billion per year. Now even the most basic maths student can see that if the currency markets lose faith in the UK’s ability to repay this debt then the pound will fall. Even more worrying is the UK will have a fiercely contested election in 2010 something that could add fuel to the fire and see even more pressure put on the pound.

For the coming months

If the UK can manage both its debt and the election then perhaps the pound could enjoy a decent second half to 2010, however I would add a word of caution… it seems highly unlikely this will happen.

The overriding problem the global economy faces is the stimulus that was pumped into every economy in 2009 has been withdrawn. Yes, interest rates will stay ultra low but taxes will go up and public services will be cut. You can expect ongoing strikes and disputes as the blame continues to be passed round and round. Currency markets will not stand for politicians bluff and posture, they will punish them severely. The quote that seems to sum up the atmosphere is “keep an eye on risk or it will set its eye on you”.

You have been warned!

Kind Regards,

Keith Spitalnick

For more information on currency exchange you can click here.