Peter Lavelle at Pure FX writes, is sterling set to be the big loser in 2013? I’ve heard several comments to that effect this week as the pound continues its sharp decline, notably against the euro. This week, sterling fell to its lowest point against the euro since October 2011 as investors place their bets as to what’ll happen this year. The general consensus is that, with the US economy picking up, and the Eurozone debt crisis receding, the UK is one of the worst-placed economies. This reflects the fact that the UK contracted –0.3 per cent in Q4 of 2012, putting us on course for a triple dip recession.
What’s going to affect sterling next? This week, there’s a lot of potential for sterling to keep losing out. First of all, Markit’s releases its monthly PMI of the UK services sector. This tells us whether UK services expanded in January and is important because it accounts for 3/4 of UK output. Alas, a contraction of 49.8 is forecast (figures beneath 50.0 signal shrinkage), which would see sterling fall further. In addition, incoming governor of the Bank of England (BoE) Mark Carney will appear before Parliament’s Treasury Select Committee, to discuss his views of UK monetary policy. Now, in recent speeches, Carney has argued that central banks should orient themselves away from fighting inflation so fixedly and focus instead on generating growth. That suggests he’s likely to ramp up the Bank of England’s printing presses when he takes the helm in July and would be sterling negative.
Meantime, the euro once more enjoyed smashing gains against the pound and US dollar this week, hitting 13-month highs against the pair of them. Funnily enough though, you’d be hard-pressed to find what particular announcement caused these gains. It’s not as if the Eurozone is out of recession or that the currency bloc’s members have taken another step to integration. Instead, this climb reflects a widespread view that the worst of the debt crisis is behind us. No longer is there an existential threat of the euro breaking up. That’s seen confidence increasingly return to the Eurozone, with a corresponding surge in the value of the common currency.
After a straight month of gains, I suspect we might begin to see the euro on the back foot before long. For one, French finance minister Pierre Moscovici told television station France 2 this Sunday that “the euro is strong, perhaps too strong in some regards.” This has sparked speculation that the Eurozone might intervene to weaken its currency, to boost exports, just as the UK, US and Japan are doing. The euro could sink as details of a government-wide corruption scandal emerge from Spain. Last week, leading newspaper El País published ledgers which seemed to show Spanish president Mario Rajoy receiving kickbacks stretching back to 1998. If Rajoy resigns over this, it would threaten Spain’s deficit reduction plan.