The peripheral Eurozone member states have always posed the biggest threat to the future of the single currency and over the past few weeks Spain has taken over from Greece as the primary cause of concern. Spanish government 10-year debt yields have shot up to over 6.0%; investor confidence is frayed to say the least; and despite Spanish Prime Minister Mariano Rajoy’s repeated rhetoric that the country will not need a bailout package, it is becoming a distinct possibility. Another Eurozone aid deal carries potentially catastrophic consequences as it will throw into question the strength of the newly-built firewall and test its capacity to prevent contagion spreading across the 17-nation bloc.
The up and coming presidential elections in France could also have a profound effect on the future of the common currency. Francois Hollande who is currently ahead of Nicolas Sarkozy on the exit polls has vowed to put France’s growth needs ahead of EU-imposed fiscal policies. The problem for the currency bloc is that if France, often seen as the Eurozone’s second in command, is not abiding by the rules what’s to stop the weaker Mediterranean nations from rebelling in a similar way?
Sterling has fared pretty well in the forex markets this week, rallying up to a 19-month high of 1.2233 this morning following the Bank of England’s Minutes report which showed an 8-1 majority vote in favour of keeping Quantitative Easing on hold. However the Pound’s strength has been moderated in recent weeks by short-term profit stances which have allowed investors to make considerable gains by selling Sterling at the current rate, but conversely these Euro buyers have prevented Sterling’s surge from really taking off.
If club med continue to dampen the Euro’s economic outlook, or the French elections kicks up a fuss then we could see Sterling begin to take full advantage and push towards 1.24 which marks a significant resistance level and a 41-month high. But remember market sentiment can be fickle, the ECB will be breaking their backs to buy the single currency some more time, and investors are often quick to react positively to short-term stimulus. The Euro is holding on but it is functioning on borrowed time, eventually its debts will catch up and time will run out.
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