Tuesday, July 5, 2011

Pound versus Euro: Key Factors

Analysts at MSN Money wonder why the single currency that logically has to be undermined by the euro area’s severe debt problems has outperformed British pound this year. 
Firstly, the specialists note that all currencies of developed nations currently don’t look much attractive for investors. Even though the European economies are suffering, the market believes that the currency union will survive even if Greece quits as euro will remain the currency of economically strong Germany.

Secondly, it’s about the hawkish approach of the European Central Bank. The ECB is much more wary of inflation than other advanced nations’ central banks, the Bank of England included.

Sterling, however, lacks such drivers. UK economic growth is weaker than expected, while inflation’s rapidly rising. British consumers are affected by rising costs and stagnant wages, so they have little disposable income to spend, retail sales are low – too bad for the consumer-centered economy. The Bank of England doesn’t intend to raise the borrowing costs anytime soon to curb the prices as it will have negative impact on the already weak economy.

So, euro has flourishing Germany and the ECB hiking rates while sterling relies on struggling economy and loose monetary policy.

It’s also necessary to note that pound isn’t a reserve currency, while euro is. Just under a third of the global currency reserves held by governments and central banks are denominated in euro and only 4% is in sterling.

The euro area may not survive the crisis in its current state. On the one hand, it may dissolve or the number of its members may at least reduce, but on the other hand, the region may turn to a more closely-knit political union that would encourage further demand for euro from those who tend to diversify from dollars.

 writed by FBS Holdings © 2011

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