UK pound to euro exchange rate stable as outlook darkens

The UK pound kept close to the 1.20 mark against the euro this week, as economic data in both the UK and eurozone points to a difficult road for 2012. In particular, in the UK retail sales dropped a precipitous –0.8% last month, signalling that consumers are no more confident in their prospects, while the coalition government borrowed more than twice as much as forecast.

In Europe meanwhile, attention has turned to Spain and Italy, where crucial labour reforms are being debated, while spluttering manufacturing output points to a deepening recession.

UK retailers on the back foot

UK retail sales declined double the expected rate last month, falling –0.8% compared to the -0.4% forecast. This has dashed hopes that consumers might be feeling more confident, following an optimistic start to 2012 including falling inflation. It also signals that the coalition will have a tougher time spurring growth, as diminishing retail sales amount to less business activity.

Is this trend set to continue? Economists are divided. On the one hand some specialists point to a proposed relaxing of Sunday trading laws, which will enable businesses to remain open longer at weekends. This in turn could encourage sales. On the other hand, there are more empty shops on the UK high street than at any time since 2008 right now, following a slew of bankruptcies over Christmas. The announcement that Game (with its 600+ UK stores) has become insolvent this week is just the latest.

Govt borrowing doubles in Feb

Elsewhere in the UK, reports that the government borrowed some £12 billion or more last month (more than double the £5 billion forecast) point to the trouble the country’s having tackling the deficit. Rising unemployment (and diminishing tax receipts as a result) mean the government is having to borrow more to make up the shortfall, putting more and more pressure on George Osborne to find measures to boost growth. This could limit sterling strength to come.

Club Med in labour reform struggle

Turning to Europe, it’s all too possible the eurozone debt crisis could re-ignite next month, as attention turns to the difficulties Spain and Italy are having implementing labour reforms. In Italy, welfare minister Elsa Fornero has taken to keeping an armed guard of six people with her at all times, as she strives to push through crucial labour reforms needed to make Italy more competitive. In the past, two ministers that attempted such reforms have been assassinated, so it doesn’t seem Ms. Fornero is over-reacting here! In Spain meanwhile, a general strike is planned for next week, which could put a spanner in the works of prime minister Rajoy’s plans to liberalise hiring practices. Of course, if either nation shows signs of giving way to protests, that could set the whole market nervousness chain reaction off again.

The political angle aside, the latest EU manufacturing and services PMIs proved damp squibs, indicating that Europe could be set to endure a longer recession than planned.

I will of course return with our next market update next week. If you have any questions in the meantime about changing currencies or transferring money abroad in general, don’t hesitate to please contact me! I’ll do my utmost to provide a satisfactory answer to your enquiry.