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

Hola amigos!

The release of preliminary GDP figures in the UK on Friday saw sterling drop against the dollar, euro and Canadian from a five week high of 1.1615. 0.2% for last quarter’s growth puts pressure on Gordon to come up with solutions rather than excuses in the third and final Prime Ministerial debate. Sterling had strengthened in the lead up to Friday’s market open on the back of optimistic economic (GDP) forecasts from the financial sector in March.

If the market still believes that Greece and other European economies have a long term solvency problem, then this may translate into a short term liquidity problem. Despite the IMF involvement and the support of some of the EU member states there is yet to be a consensus on how the €30billion Greek bailout might be spent.

The British press has made quite a story of the apocalyptic consequences of a hung parliament. Anecdotally a hung or ‘balanced’ parliament has led to the slight devaluation of a domestic currency, but with previous coalition governments other factors have determined this loss in value so it does not really stand to reason that this is the default consequence.

Inflation and interest rates could rise

A loss in the value of the pound may detrimentally affect the balance sheet and could cause a rise in inflation resulting in the need to increase interest rates before the economy is ready; and yet it must be conceded that shaky market confidence, which is natural with a slow recovery, has fuelled the press and government to exaggerate and peddle this view that a hung parliament can only mean a coalition of confusion and in-fighting regardless of the fact that all parties agree their priority is the economy.

Labour has stressed that their priority is economic stability, jobs and trade and liquidity. According to the polls Labour can’t do this on their own, and with the narrowing of the polls in March the market sold sterling accordingly; yet this most recent rally suggests that the market may have reconciled itself with the fact that a hung parliament where a united coalition focuses on maintaining growth, jobs and the recovery, might not be detrimental to economic growth.

Further to this Mr Cameron and George Osborne, the City’s ‘Golden Boy’, have already made assurances that they will take money out of labour proposals to start repairing the deficit. It seems that the markets are responding positivity to both of the major parties stating their priorities regardless of who wins on 6th May.

Hung Parliament?

The real risk to the economy is with a hung parliament that does not deliver on its economic pledges. At the moment you could argue that Labour’s initiatives have not delivered the recovery and growth that was promised, but whether or not that is sufficient reason to vote for another party is not the point. The most important issue is that all the money borrowed and pumped into the economy has not yet been paid for, and has not translated into the moderate growth we might have expected.

Many people simply want to know whether the rate will go up and where it will go to. There is no way of answering this at this time. The election is a blip. We rely on our economy performing consistently, and improving in those damaged areas in order to give a firmer outlook. Private sector investment is key, but can only come from confidence and leadership in business in government. I am still bullish on sterling for 2010, but my expectations have changed largely to take into account the relatively poor economic data.

Hasta la proxima!

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