The Smart Currency Weekly Exchange Rate Update for May 27, 2010
For the British pound sterling, this week has been about risk appetite and aversion in investing. There has been a lot of confusion caused by the mixed and seemingly contradictory economic data being announced. While GDP was slightly higher for the first quarter, retail sales continue to do poorly with May retail sales doing much worse than expected.
An issue that is on the minds of many people is the growing government debt. However, the market is unwilling to sacrifice economic growth in order to make significant progress in eliminating the debt. This places the British government in a tight spot in which they have to cut the government debt while maintaining the growth in the economy. In an attempt to eliminate some of the growing debt, the British government announced that it would be making cuts adding up to 6.2 billion pounds at the beginning of the week.
Government debt is also causing problems for the Euro. The debt is having a negative affect on the Euro, which is beginning to lose its edge against the US dollar and the Sterling. Just recently, Provincial Bank, unable to continue paying its debts had to be rescued by the Spanish government.
The Euro however, can still find a fan in the Chinese Government, which announced its support for the Euro, and it’s refusal to trade in its reserves of Euros in favor of another foreign currency. Despite this, the problems concerning the Euro are likely to continue for while.
The United State’s seems to be improving economically and some risk appetite has returned. There has been an increase in home sales, the demand for durable goods has increased, and the United States economic data supports the idea that the economy is improving. It is doubtful however, that this positive economic growth will continue for much longer.
In Australia, there was a sharp increase in the exchange rate between the British pound sterling two weeks ago. This may not last long because there is beginning to be a decrease in the previous increase in risk appetite.
The British pound sterling has had a relatively good week where it gained against the US dollar and the Euro. The effort of the British government to make a dent in the government debt appears to have been welcomed. However, the British government has to maneuver very carefully and promote economic growth while cutting into the government debt. This will likely cause the market to continue to be very volatile.
