The Pound is rallying back against the safe haven US Dollar reaching daily highs of 1.565 from daily lows of 1.547. This positive growth from the Pound comes a day after the OECD announced a report predicting the UK economy will fall into recession early in the New Year. The Nationwide Housing Prices grew an unexpected 0.4% in November, registering a year on year growth of 1.6% exceeding analysts’ expectations of 1.3%. Nationwide noted the surprise nature of the resilient housing market and predicted the growth may not be sustained in 2012.
The Bank of England also released mildly positive news today for the Pound; Net Lending to Individuals increased to £1.3 billion in October following £0.3 billion in September. But Consumer Credit decreased from £.0.580 billion in September to £0.049 billion in October prompting analysts to question whether today’s GBP/USD rally marks the eye of a longer term storm.
The UK’s economic inseparability from the Eurozone debt crisis has had a large part to play in last week’s decline against the Dollar. Investors appear to be reacting to political leaders calling for financial overhaul and closer fiscal integration. The European Commission have proposed that a fiscal authority must stabilize and gradually reduce sovereign debt, disallow free-riding from less-disciplined states, stop attacks by investors on Eurozone governments whilst ensuring that all policies are in the best interests of every member state.
The conundrum is clear; How can Germany and the other 5 Euro-nations boasting AAA credit ratings help the debt-ridden countries of Greece, Italy, Portugal etc. without losing their top level credit status and without ejecting the poorer nations.
One tough but possible solution being discussed is joint liability for sovereign bonds; Eurobonds would account for 85% of government bonds and each country would be responsible for its own and other Eurozone debts. The riskier countries would still be penalized in the form of annual premium payments to the safer ones in exchange for the guarantee of their debt. The premiums would be externally adjudicated in accordance to economic factors such as debt/GDP ratio, and membership would hinge on the successful payment of these each year.
The idea is that closer monitoring and uniform governance, at the expense of a certain degree of sovereignty, would allow less severe austerity measures in the poorer countries and swifter budget/tax control in the more productive countries.
However, Eurozone leaders, and in particular the influential German Chancellor Angela Merkel, have frequently refuted the idea of Eurobonds and even if that were to miraculously change, the implementation would be incredibly difficult. And of course; there is no guarantee of the positive results envisaged here.
Consequently it remains highly probable that the Pound could suffer further at the hands of the benchmark US Dollar in terms of risk liquidation flows.
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