Foreign Exchange - UK Weekly Update - Monday, December 3, 2012 16:55 - 0 Comments

Developments overseas put some wind in sterling’s sails

The main talking points over the last week included the Greek deal that keeps the country’s finances on life-support and the continuing courtship between Democrats and Republicans in the US Fiscal Cliff talks, both of which knocked and supported risk appetite and, by extension, sterling in almost equal measure. With a few weeks left until Christmas and the thinning trading volumes that the holiday season entails, the pound’s fortunes entering the New Year could be determined not so much by UK data releases (a potential Fitch and Moody’s downgrade of the UK’s triple-A credit rating excepted) but by these unfurling non-domestic events.

Judging by the market reaction when news of the Greek debt deal broke in the early hours of Tuesday, no one expected the European Finance Ministers to leave the meeting that began on Monday without some sort of accord having been reached. The headline number – reducing the Greek debt-to-GDP ratio to 124% by 2020 – will likely prove to be a mirage, as even the debt sustainability plan decided upon put the ratio at 126.6% according to reports, with the effects of the biggest measure responsible for more than half of all debt savings, the debt buyback programme, uncertain. However, outside expectations for the level of progress made in the meeting were modest and it is more useful treating the figures as ‘aspirational’ for the time being (or at least until after the 2013 elections in Germany, when the politically contentious prospect of haircuts on Greek debt will be back on the table). Whilst the level of optimism following the meeting felt muted, the news that Greece’s immediate funding concerns had been allayed was enough for GBPUSD’s run above 1.60 to continue.

Throughout the course of last week, the Fiscal Cliff negotiations trundled on in the US. As is often the case during such bi-partisan talks, the to-and-fro of strategic announcements from either side painted different pictures of how imminent an agreement is. It was disappointing to hear of no real progress following the meeting on Thursday between Timothy Geithner, the Treasury Secretary, and the Republican Speaker of the House, John Boehner, with an impasse reached between Secretary Geithner’s push to ‘increase revenue’ and Mr Boehner’s entrenched stance on spending cuts. Despite the framework of a deal reportedly being established, the uncertainty surrounding the Fiscal Cliff held back risk-on flows during the week and kept sterling from extending gains against the dollar past 1.6060 last week.

Although risk took a small hit from the political posturing and ideological differences in the negotiations stateside, the pound largely benefited from the positive tone set by the Greek debt plan at the start of the week. The appointment of Mark Carney, current Governor of the Bank of Canada, as the new Governor of the Bank of England on Monday was greeted favourably, as his stewardship of Canadian monetary policy since the onset of the financial crisis has won him plaudits. However, the UK economy, with its greater reliance on financial services as a proportion of GDP and larger banks, will be a much greater test, but no real changes to the BoE’s current monetary stance are anticipated in the medium-term as a result of Mr Carney accepting the post. US GDP Q3 growth was revised to 2.7% on Thursday, up from the first estimate of 2.0% and the dollar consequently headed lower against the pound and euro. US GDP growth was bolstered by a huge government spending increase of 3.5%, the temporary effects of which mean that Q4 growth is expected to come in a little below 2.0%.

Both the pound and euro were boosted heading into the weekend upon news of the Greek debt deal passing a Bundestag vote. Hours earlier on Friday, the unemployment rate in Europe had recorded its highest reading thus far at 11.7%, although it was in line with median forecasts and so the euro took the news in its stride. It was, however, another beacon lit on top of all of the discouraging economic signals emanating from the Eurozone. ECB President, Mario Draghi, had also weighed in at the start of the day, warning that the monetary union must leave behind the “fairly world” of lax regulation and poor coordination responsible for the proliferation of the euro crisis.

The start of this week is fairly soft for data releases but ends with European GDP, base rate and QE decisions from the Bank of England and the European Central Bank on Thursday (both central banks are expected to leave rate and asset-purchase decisions on hold), and finally, US Non-Farm Payrolls and unemployment readings due out Friday afternoon likely to be the biggest shakers for sterling.

Have a good week.