Euro update 2010

The Euro has made the most of its good fortune. Over the course of six weeks it added 10% against the US dollar and 9% against the pound. Its success against the dollar was mainly due to investors dislike of the USD. A knock-on effect of all the activity in EUR/USD trading, has been that Sterling has been left behind.

Nervousness has dogged Sterling throughout October and there could be more problems on the horizon. Firstly, the Government’s “austerity” policy may well tip Britain’s economy back into recession, and secondly, the Bank of England could well decide to run another round of quantitative easing that would dilute the currency’s value. Either one would disadvantage the pound, while the two together would be a real problem.

However, there was a little cause for optimism, with the release of Britain’s figures for economic growth in the third quarter. Maybe, things aren’t as bad as everyone thought. The numbers are far more positive than even the staunchest optimists had expected. Growth of 1.2% in the second quarter and 0.8% in Q3, have set Britain up for a financial year well ahead of the government’s estimates.

Sterling is not off the hook though. There will be two revisions to the third quarter growth figures and both could be detrimental to Sterling. Half a million public sector redundancies might destroy consumer confidence and plunge the economy back into recession. On the other hand, the UK economy has performed appreciably better in the last nine months than most analysts predicted.

The Euro has lived a charmed life during the last two months. At some point its luck could well run out.