Growth & Credit Status Hold Sterling Back
February 3rd, 2010
Britain emerged from recession in Q4 – just. Germany has no plans to help rectify Greek budget problems.
Sterling managed to add about half a cent, opening this morning in London at €1.1450, but did it the hard way. A one-cent setback on Tuesday and a peak of over €1.16 show just how much the pound had given back before squeezing that modest weekly gain.
The week began with optimism that figures for the fourth quarter of 2009 would confirm that, after 18 months, Britain had at last managed to put the recession behind. Having overestimated growth in the third quarter, analysts were quietly confident with their guess that gross domestic product expanded by +0.4% in Q4; not fantastic growth but acceptable under the circumstances.
Again there was disappointment. At +0.1% quarterly growth was the smallest ever seen. The optimists who had filled their boots with sterling ahead of the announcement were quick to offload their holdings.
Surprisingly, the dismay had evaporated by the end of the following day following a speech by Andrew Sentance, the ebullient Monetary Policy Committee member who has recently made a habit of directing the market’s attention to the possibility of higher UK interest rates.
Addressing the British Property Federation he mentioned the word ‘growth’ 21 times, referred to the pound’s ‘competitive’ position against the euro and defended the idea that monetary policy should ‘keep a check on inflation over the medium term’. The market’s overall take on the speech was that at least one MPC member was leaning towards higher interest rates.
The old credit ratings story cropped up again on Thursday, this time with rather more than vague rumour to make it fly. Standard & Poor’s, one of the big three credit ratings agencies, announced it had its eye on sterling because that ‘UK banks are no longer among the world’s most stable and low-risk.’ It did not amount to a downgrade – Britain still has its top-level AAA credit rating – but it was an unwelcome development for sterling.
Britain is not alone with its credit-related problems. The budget deficit in Greece continues to pressurise the country’s creditworthiness. At the same time it casts a shadow across other potentially problematic areas such as Portugal, Ireland and Spain and, therefore, the euro zone as a whole.
Two incidents last week served only to complicate the situation. First, rumours of China’s interest in a Greek government bond issue turned out to be false. Although the issue went through successfully (€8 billion at 6.2% (ouch) for five years) the realisation that China was not involved made some investors sell their holdings.
The second ‘misunderstanding’ involved a rumour that France and Germany were putting together a package of aid for Athens. Germany’s economics minister, Rainer Brüderle, told MPs that ‘there should not be a collective bailout for lopsided developments at national level.’ He also said that ‘some euro states are showing dangerous weakness. This may have fatal effects on all states in the euro zone.’ Effectively, H. Brüderle acknowledged potentially fatal problems in Euroland that Germany would not help to solve. It was an unhelpful combination for the euro.
After spending the best part three months between €1.09 and €1.13 it looks as though the pound might be in the process of carving out a slightly higher range between €1.13 and €1.16. But do not get carried away, the worries are still there. Buyers of the euro should take advantage of any spikes to hedge 50% of their exposure.
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