The Euro has gained over half a percent against Sterling today following statements from German businesses backing the development of a joined Euro zone bond. This has heaped pressure on Chancellor Merkel who has up until now defended her position against this bond.
Germany posted encouraging GDP figures in Q1 of 1.5% and these are expected to slow to a 0.5% growth in Q2 released tomorrow morning at 07.00. Do not be surprised if they outperform this expectation again and we see Germany lead the Euro back into 1.12 territory against Sterling.
We also have UK CPI released tomorrow. Mervyn King recently stated that the UK are likely to hold interest rates for some time and this has meant that GBP has only made marginal gains against a struggling Euro in the last few weeks. Inflation is expected to remain well above the BofE target of 2%, heightening from 4.2% to 4.3% year on year (YoY). In all I would expect this to be a bit of a non event, last months release saw some Sterling weakness after inflation actually detracted somewhat, even a better than expected figure is extremely unlikely to change MPC (Monetary Policy Committee) members’ minds considering neglible growth in the UK economy.
Jumping back from economic data to the Eurozone bond, I am, personally well in favour of a common Eurozone bond. As a Brit, whose own economy has heavy exposure to most of the zone I feel it will provide the security that the markets are missing at the moment. Not only will this calm the markets and stop some of the aggressive swings we are seeing at the moment, it is likely to provide a backbone to the FTSE and other European stock markets. The commitment that is currently lacking from Germany and France are essential to the survival of the zone. They certainly have put their money where there mouth is in terms of support for the bailouts but if they are in the Euro for the long term they need to put themselves in the same boat as some of these other economies and lend some of their economic strength as support for countries well and truly in crisis.
If I was speculating in the currency markets then I would be very hesitant to go near the euro without an existence of common Eurozone bonds. Perhaps the smart reader will try to make savings by taking advantage of spikes to purchase Euros before this happens. Merkel has met with Sarkozy today and it is rumoured that this is the hot topic of the day. If so then expect any news that develops overnight tonight and tomorrow to add further strength to the single currency.