Euro update 2012

The efforts of EU leaders in hauling Greece back from the brink of bankruptcy have not done the euro too many favours. Against both the US dollar and the British pound it is a cent lower than a month ago. The euro-gloom should not be overestimated though: to an extent the losses are an accident of timing. EUR/USD is trading at a similar level to January, October and December last year. GBP/EUR is close to the top of a range that has contained it since November 2008. It is not that the Greek rescue has scuppered the euro, more that it has failed to re-establish investors’ appetite for it.

But although they have swept the Greek debt problem under the carpet for the time being, the recent economic indicators from the euro area have been far from edifying. In a single day in late March, Germany’s manufacturing sector purchasing managers’ index (PMI) swung from slight growth at 50.2 to undeniable contraction at 48.1. The German services sector PMI was still positive at 51.8 but still a point down on the month. For pan-Euroland the equivalent figures were 47.7 and 48.7, both still negative and both lower than February’s readings. Industrial new orders were down by -2.3% in January and by -3.3% on the year. Numbers like these are unhelpful to the euro, especially when they arrive within an hour and a half of each other.

The figures also make it more likely that the Euroland economy will have shrunk, for a second quarter, in the first three months of this year. In Q4 2011 it contracted by -0.3% (Britain -0.2%, USA +0.7%). Confirmation – or otherwise – of that is at least a month away but it is a fair bet that investors will not flock to buy the euro if they see a minus sign in front of the Q1 gross domestic product growth figure. Recession is a big turn-off.

Having said that sterling is not bomb-proof either. Although the market is enthusiastic about the Chancellor’s deficit-reduction campaign, investors remain nervous about its dampening effect on the UK economy. Sterling/euro is within three cents of its highest level in more than three years. It could rise further, of course, but sterling’s track record is not illustrious when faced with such a situation. Again and again it has demonstrated an uncanny skill for snatching defeat from the jaws of victory.