Europe Moves Towards Fiscal Union

Currencies Direct January 31st 2012 - 2 minute read

Europe took a major step towards greater fiscal integration
overnight, as all EU members except the UK and Czech Republic agreed to
measures to reduce budget deficits and allow greater oversight by the European
commission. The pact should be in place by March with the ratification and
implementation to follow shortly after.  Automatic fines of around 0.1% of
GDP will be levied on countries who fail to reduce their deficits by the agreed
proportions.  The fines smack of a token gesture given it will be one of
the PIIGS that fail the tests and clearly they would not be expected to pay,
and the fact that the Maastricht treaty imposed broadly similar rules which
were blatantly broken by all member states is one of the reasons Europe finds
itself in its current state of woe. As with recent EU meetings, the news will
likely trigger a short lived Euro bounce before selling pressure resumes.

Sterling continues to climb against the Dollar driven by the
recent surge in the value of the Euro against the Dollar. Apart from PMI
figures, there is little by the way of meaningful UK data out this week to move
Sterling so expect it to stay in lockstep with the Euro-Dollar. Expectations
for the PMI data is expected to show a mixed bag, but given the GDP reading
earlier in the week there is more chance of disappointing readings than
surprises to the upside and that should translate into Sterling weakness.

US data due today and for the rest of the week include personal
consumption expenditure which is expected to show a slight increase and ISM
manufacturing on Friday is also expected to show a positive reading. Over
recent weeks we have been seeing an about turn in the way the Dollar reacts to
positive US data. Over the past few years the risk-on, risk-off theme has been
the dominant driver of Dollar movements where good US data was seen as risk-on
and the Dollar fell. Recently we are seeing a reversal in the theme, and
positive US data is increasingly leading to the US Dollar strengthening.

Report by Alistair

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Currencies Direct

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