Sterling/euro reaches new highs

The peak for sterling last year was the £1.19 it achieved in late June. Prior to that the last time it saw £1.19 was during its precipitous tumble almost to parity with the euro in November 2008. Now it is back up there, having a serious look at an upward break that could set it on its way to £1.30. It is possible? Or will the gravity that has trouble it for nearly three years drag it back to earth once more?

On the face of it, this should be a no-brainer. Euroland is displaying all the worst traits of a currency union that applies a one-size-fits-all interest rate to a group of 16 different countries. Britain, meanwhile, seems to have accidentally elected a coalition government blessed with the ability and commitment to set right a national debt that will have doubled in the space of a handful of years. Sterling is sure to be the winner? Right?

There can be little doubt that, if the leaders of Euroland were to sit a GCSE in financial crisis management, there would not be many A-stars on the list of results. The Greek crisis had been looming for years, ever since the country fudged its accounts – ably assisted by Goldman Sachs – to cheat its way into membership in the first place. On at least three occasions this year the euro zone leaders put their heads together to come up with a suitable financial safety net to bail out Greece and hold the currency union together. The first few efforts, each with a successively higher price tag, failed. The agreement reached at the beginning of May had to work; if not, Greece would have had to default on repayments in the middle of the month. The €750 billion stabilisation fund was massively bigger than its failed predecessors because the delay had added the names of Portugal and Spain to the danger list.

So far, the bailout has done its job. Greece has not gone bust because the EU and the International Monetary Fund have filled its funding gap at an affordable price. But there are rumours of two ‘secret clauses’ in the agreement. One apparently says that if the bailout is proved to be unconstitutional in any European court it will be scrapped. The other says the nations providing the money do not have to do so at a loss; if they cannot raise cash at less than the interest rate charged to Greece (or Spain or Portugal) the programme grinds to a halt.  Neither clause would be ridiculous but the possibility of their existence raises doubts about commitment, especially on the part of Germany which is up for €145 billion of the money.

Britain’s new coalition government, meanwhile, has been making the right noises. Savings and waste-avoidance is supposed to save £6 billion this year but that is just the low-hanging fruit. The real meat of the strategy will be revealed in the budget on 22 June. Investors are quietly confident that the new boys will sort things out but not until a satisfactory budget is revealed will the pound – and the gilt market – fully be able to command the confidence of investors and credit rating agencies.

In the meantime sterling has gained good ground against a weak euro to break the £1.20 benchmark. There is bound to be a queue of sellers eager to take advantage of these highs but there will also be buyers keen to avoid missing the boat if the pound leaps ahead.

Source: Moneycorp

By Eloise Horsfield | Property News | June 7th, 2010

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