Celtic tiger loses its claws

An unexpected boost in German IFO business sentiment gave the euro a lift yesterday. The data showed sentiment at a three-year high, hitting 106.7 versus a forecast level of 105.5 and reaffirming the positive data flow from Germany over the past month.

However, Irish woes continued with Standard & Poor’s, the ratings agency, downgrading its debt to AA- with a negative outlook. The huge cost of supporting the Irish banking system will push debt towards 113% of GDP according the S&P estimates, well above the Eurozone average and putting increasing demands on the Celtic tiger’s public finances and creating serious headwinds for economic growth.

Irish ministers were understandably furious, but the fear is that the austerity measures designed to reduce the government Budget deficit may make the job harder because of increasing unemployment and depressing tax revenues. This fear, applicable to the other indebted Eurozone nations, is once again hanging over the euro and is allowing Sterling and the dollar to regain lost ground against it.

US figures yesterday also disappointed, new home sales fell 12.4%, durable goods orders dropped 0.3% and the house price index slipped 0.35 month-on-month, the economic picture continues to deteriorate and the corresponding drop in bond yields over the past month as investors park their money in fixed income instruments suggests the market now expects the US to slip back towards recession and another bout of quantitative easing. The US dollar has fallen back against the pound, with Sterling now back over the 1.55 level.

With data releases still light this week, Sterling traders will look towards today’s (26 August) CBI reported sales figures as a gauge of the economic recovery in the UK, but the important data is tomorrow which sees UK GDP reported along with US GDP and US Federal Reserve Chairman Ben Bernanke speaking in the afternoon.