Currency Update 22nd March 2010

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!

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