Sterling Euro trading at three year high as France elect anti austerity President amid political turmoil in Greece

Tom Tong08/May/2012Currency Updates

The euro dropped throughout the week as the electoral weekend in France and Greece approached and macroeconomic data in developed economies continued its recent disappointing run. The combination of weakening business confidence worldwide and lacklustre job creation in the US proved too much for risk assets generally, as stocks and commodities followed the euro near recent range lows by Friday. Sunday’s elections in Europe, in particular the shocking result in Greece (both mainstream parties combined failed to reach one-third of the vote and will be unable to form a Government by themselves) pushed the euro through the 1.30 level that had been strong support recently. All eyes are now on European policy makers, in the hope that reality will finally seep through and we see a shift away from failed austerity policies.


The dichotomy between weak growth data and more steady survey results continues to be resolved in favour of the former. After the disappointing GDP report, all three PMI surveys dipped noticeably, although the composite level is still consistent with very slow growth. The key event is this week’s MPC meeting. The general deterioration of UK and European indicators is supportive of our view that there will be at least one more increase in the Gilt purchase target. However, neither King nor Bean mentioned this possibility in their respective speeches last week. Therefore, we think that there will be no news out of the Bank of England this week, but that the announcement will be delayed only till next month. However, it is a close call at this point. Either way, we expect last week’s trend in sterling (falling against the dollar while rising against the euro) to continue for the next few months.


Terrible European macroeconomic data were overshadowed last week by the Greek and French elections. More on those in a moment, but we want to point out the downward revision in European PMIs across the region, and unemployment rose by 169,000. Spain continues to lead the way down, as its economy destroyed another 73,000 net jobs (in seasonally-adjusted terms) in April. Now electoral results have joined macroeconomic reality in dealing a harsh rebuke to German-imposed austerity policies. In France, voters elected Hollande over Sakorzy for president, and in Greece, the results were as revolutionary as formal elections can yield. The political status quo there collapsed loudly, as the two main parties (and the only supporters of the harsh measures imposed by Brussels and Frankfurt) dropped from a joint 78% of the vote in the last elections to barely 32%, and will in all likelihood be unable to form a Government. A Greek exit from the euro is increasingly looking like the base case. German reaction was once again surreal, as Merkel rejected any renegotiation of the stability pact with France and urged Greece to stick to reforms. The euro dropped sharply on the elections’ results, and dipped briefly below the 1.30 level on Sunday night. We think that this breach of the recent range is significant and think that the bearish trend will continue.


Another disappointing labour market report out of the US. Only 115,000 jobs were created, against expectations of 170,000. This is barely enough to keep up with the natural growth of the job force. Unemployment ticked down again, to 8.1%, but this was entirely due to the decline in the labour force. While data lately has tended to disappoint, we think that weather pattens and iffy seasonality had something to do with the latest data, and think that job creation around the 200,000 mark is sustainable unless the European crisis gets worse and spills over to US business confidence, which does not seem to have happened yet.


Written by Tom Tong

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