Against the euro, the pound looks sound
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The pound has upside against the euro. The UK economy probably grew in the first quarter while euro land keeps heading down. And UK inflation looks firmer too – and that may deter more British money printing.
After a contraction in GDP of 0.3 percent in the fourth quarter, Markit says its surveys point to a rise in UK services GDP of about 0.7 percent in the first three months of this year and growth of 0.5 percent for the UK overall. The same firmās survey for March pointed to overall contraction in euro zone service industries, with deep recession in Spain and Italy.
UK growth is positive for the pound in part because of what it means for monetary policy. The Bank of England has shown great love for the printing press. And readily printed pounds tend to be cheaper pounds. But the second round of QE is due to be completed and signs of growth will reinforce those on the BoEās Monetary Policy Committee who are wary of more – notably Spencer Dale, its chief economist, and Martin Weale.
Dale has pointed to a good reason to hold back: inflation might not come down quite as fast as the BoE hopes. There are signs of this in recent data. UK manufacturers reported significant rises in input prices in March. High global oil and commodity prices are the chief cause. Global inflation pressures are raised by the floods of cash issued by the U.S. Fed, the Bank of Japan, the European Central Bank – and the BoE.
For its part the euro faces many risks. Given recession and austerity, the European Central Bank may seek to find ways to loosen monetary policy further, even if German hawks have other ideas. And the queue of periphery countries which could spur further euro alarms is long. Spanish and Italian sovereign bond yields are rising again.
The euro is currently worth 83 pence and has held above 80 pence since late 2009. A drop below 80 seems likely this year. Against the dollar the poundās course is less clear. The American currency also stands to gain from firming growth and the reduced likelihood of QE3. But in another severe leg of euro crisis investors are more likely to clutch at dollars than pounds.