Sterling reached a five month high against a broadly weaker euro today, hitting a day high of €1.1625 this afternoon.
Mounting worries about sovereign credit risk within the euro zone have undermined the euro, as tumbling Greek government bonds highlighted the market’s concerns over their ability to pay back its soaring deficit.
Mark Bolsom, Head of the UK Trading Desk at Travelex, the FX Payments Specialist, comments, “Sterling was also bolstered by Bank of England MPC member Andrew Sentance’s bullish comments yesterday. The markets took comfort in his apparent assurances that Quantitative Easing will not be extended past its current level of £200 billion.
Bolsom continues, “Despite Sentance’s comments, I still think a double-dip recession is a strong reality and shouldn’t be rejected. It is an undeniable fact that both the government and Bank of England have pumped in unprecedented levels of stimulus into the economy and it has grown only marginally.
“And because of our huge deficit, we expect a real tightening of fiscal policy after the general election. The situation stands to get far worse when stimulus is withdrawn – we can see already that retail sales are already slumping now VAT has returned to its former level. The real question is what will happen to growth after the stimulus is withdrawn? I wouldn’t go as far to say return to recession is inevitable, but I would say it is a strong possibility.”
With regards to a broadly weaker euro, Bolsom commented, “Most Euro zone states will be pleased with a weaker euro as it helps their competitiveness in foreign markets. Certainly, Head of the European Central Bank, President Trichet, has been vociferous in calling for a stronger dollar against the euro.”
(City press release, January 28, 2010)