Pound to euro unchanged on mixed UK-EU outlook

The pound to euro exchange rate remains unchanged at 1.20 this week, as a series of economic releases indicate that growth in both the UK and Eurozone will be hard-won in 2012. In particular, credit rating agency Fitch has threatened to slash the UK’s triple A credit rating, while in Europe, European Central Bank president Mario Draghi has pointed to the competitiveness gap between northern and southern members as the next big hurdle. Looking ahead, it looks as though the pound-to-euro rate will remain tethered inside the 1.1750-1.20 range established at the outset of 2012, unless a disaster in either Britain or Europe tips the balance.

In the UK, pessimism has flared as rating agency Fitch announces there’s a 50% chance it will slash the UK’s prized AAA credit rating inside two years. Fitch made the announcement on concerns about the UK’s ability to withstand new economic shocks, especially given the mixed global forecast and recession in Europe. Should the UK be veered off-course, it might prompt the coalition government to deviate from its deficit reduction programme, hence warranting a reduction in its AAA credit rating. However, in spite of this pessimism, Fitch was complimentary about the credibility of the government’s spending cuts agenda.

UK pound pessimism also increased as unemployment rose in the last three months of 2011, according to recent data from the ONS. Unemployment climbed 28,000 between October to December last year, indicating that the UK labour market has yet to stabilise. This also makes it more difficult for Chancellor George Osborne to stimulate growth, as tax revenues decrease while benefit claims increase.

Turning to Europe, there has been some optimism as Greece secures its second bailout from the EU Commission. This €130bn is intended to finance Greece up until 2015, while it carries out essential restructuring to its economy. However, as the market turns from Greece to other areas, pessimism has grown as the increasing competitiveness gap between north and south member states comes into focus. Speaking at the European Central Bank’s monthly inflation report, President Mario Draghi said it is essential peripheral states such as Spain reform their economies, reduce wages and therefore increase their competitiveness against partners such as the Netherlands and Finland. This then is likely to be the focus in Europe in weeks to come.