The pound edged up against a still struggling euro, albeit the single currency managed to stay in range of a two-week high hit on Tuesday – helped by a rally as investors sought to cover extreme short euro positions.
Whilst the recent Budget is aimed at improving the UK financial position, concerns are being raised about the impact of tax rises and spending cuts. Is it time to lock in rates against the Euro, perhaps for your holiday travel money?
“The current economic circumstances call for a decisive fiscal consolidation,” said Olli Rehn, the EU economic affairs commissioner. “The budgetary targets presented by the UK Government are in line with this strategy.”
A positive EU nod of approval for the Coalition Government, in contrast to the message given about the Labour fiscal plans put forward in March which were considered to lack sufficient ambition.
The Commission did say that it recognised the process of fiscal consolidation would be difficult, and cited the 25% reduction in Whitehall budgets over a four-year period as “challenging”.
The concern is that taking steps to address the debt crisis could halt economic recovery or cause a double-dip recession.
Howard Archer, chief European economist at financial analysis group IHS Global Insight, said: “Worryingly, there are signs in the very latest survey releases that the heightened euro zone debt crisis and an associated earlier or more aggressive tightening of fiscal policy in a number of countries is starting to weigh down on economic activity.”
While growth should improve in the second quarter, he said the 16-nation euro zone faces “significant obstacles to robust growth”.
Today the Bank of England’s Monetary Policy Committee voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%.
It also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.
Bank Rate has now been held at a record low of 0.50 per cent for more than a year.
The minutes of the meeting will be interesting to see after Andrew Sentance’s vote last month to raise interest rates.
The announcement by the Bank of England saw the pound fall back below 1.20 against the Euro.
The European Central Bank held the bloc’s interest rates at a record low 1%.
The International Monetary Fund (IMF) has raised its forecast for global economic growth this year, from 4% to 4.5%.
It said the world economy grew strongly in the first part of this year. It said that European banks in particular were being affected by the concerns about government debt and so were less willing to lend to each other – the consequence being less credit available to the wider economy which could undermine the recovery.
A list of 91 banks that will undertake “stress-testing” across Europe was released late on Wednesday, including the UK’s big four banks, HSBC, Royal Bank of Scotland, Lloyds and Barclays. Major European banks such as Deutsche Bank and BNP Paribas were also included.
The stress tests, to be completed by 23 July, are designed to assess whether Europe’s banks are able to withstand future financial shocks.
The euro rose to a seven week high against the dollar on Wednesday in technical trading after the breach of a key resistance level prompted some investors who had bet against the single currency to buy to prevent losses.
Market Analysis by Tony Redondo, TorFx
Any opinions expressed in this document are aimed at helping readers understand market conditions and developing trends. Readers are wholly responsible for their own trading decisions.
Get our FREE weekly newsletter to keep up to date with all our foreign exchange and personal finance news,tips and reviews plus our latest offers and discounts.