Analysis / Daily / Finance / forex / Money

Sterling steady against euro despite election fears

One Pound

Over the past month, the pound has sharply outperformed a euro weakened by the European Central Bank’s quantitative easing programme. However, the pound could be upset if chancellor George Osborne is tempted into a big giveaway this week, in the last Budget of the parliament on 18 March, only seven weeks ahead of the general election on 7 May. He would be ill-advised to do so. Despite recent economic progress, prudence is still needed: the UK national debt has more than quadrupled since 2000. The forthcoming election is a source of uncertainty likely to trouble investors. The result is unusually difficult to predict. The most probable outcome is a coalition or minority government. Small parties could wield unusually large influence. Weak government is in prospect. Markets, including sterling, will not take kindly to a new chancellor back-pedalling on responsibility for public spending. Despite these risks, the pound has been trouncing the euro. Negative market yields for government debt in Europe have been driving investors away from the euro, and sterling has benefited.

euro

The euro held firm this morning after soft US data and nerves ahead of this week’s Federal Reserve policy meeting broke the dollar’s rally and helped the common currency pull out from 12-year lows. The euro was steady at $1.0568, having rebounded overnight from $1.0457, its lowest since 2003. The euro has been under pressure since the European Central Bank activated its €1 trillion bond-buying quantitative easing scheme last week and drove the euro zone bond yields to record lows.

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The dollar was almost flat against the yen and the euro in Asian trade this morning ahead of a closely monitored Federal Open Market Committee in the U.S. The greenback dipped to Y121.29 soon after the Bank of Japan’s policy makers decided to stand pat at their board meeting. A bank dealer described the fall as “a knee-jerk reaction,” and it proved only short-lived as the dollar quickly bounced back to its level before the BOJ outcome. Market participants said it is very likely the Fed will drop the word “patient” from its statement due out Wednesday, focusing attention on the likely timing of a U.S. rate increase.

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