Euro Firms Despite Soros' Ultimatum For Germany, While Pound To Dollar Exchange Rate Heads Northwards

Modified: Monday, 10 September 2012 09:42 BST - Written by Tim Boyer

STORY LINK Euro Firms Despite Soros' Ultimatum For Germany, While Pound To Dollar Exchange Rate Heads Northwards

Last week's session saw marked fluctuations in global appetite for risk, as investors moved to rapidly adjust their expectations regarding the actions of the world economy’s two predominant central banks. Last Thursday brought a key day for the euro, as ECB President Mario Draghi used his monthly post-policy announcement press conference to reveal plans for a deeper, more meaningful bout of bond purchasing for his central bank. On the face of it, this news should have sent the single currency spiralling against the world’s other major currencies. However, the upside for the euro which followed Draghi’s words was limited – the GBP EUR exchange rate briefly dipped into the 1.25s before recovering to trade back in the 1.26s again late on Thursday. The reason for market participants’ luke-warm response was simple – Germany did not approve. With elections due in the Teutonic powerhouse in the early part of 2013, German policymakers were queuing up to put the boot into the ECB’s plan to use euro-area funds to provide further assistance to debt-burdened peripheral states, many of which German voters consider to be ‘feckless’.

Doubts over the wisdom of the ECBs plans were added to over the weekend when leading investor George Soros spoke out with a clear message to Germany – ‘put up, or shut up’. Soros suggested that the leaders of the euroland’s premier economy should make up their minds whether they were going to wholeheartedly support the ‘grand plan’ which the region embarked upon in 1999, when the single currency was instigated. If the answer was ‘no’, then they should leave the euro post haste. If they wished to persevere with the project, then they should commit to a ‘go for growth’ set of policies whose aim would be to increase economic activity in the EU to 5% per anum. Such grave words from one of the most respected figures in the markets are certain to sow seeds of doubt in the minds of investors holding euro-denominated assets in coming sessions.

Meanwhile on the other side of the Atlantic, speculation has reached fever-pitch regarding if / when the US Federal Reserve might announce a third recent tranche of QE for the US economy following Fed Chairman Ben Bernanke’s comments at Jackson Hole ten days ago. Last Friday’s tame Non-Farm Payrolls numbers for August have sent levels of QE3 speculation rocketing, weakening the Buck and propelling the GBP USD exchange rate through the 1.6000 level for the first time since May. Further upside appears possible for the pair if the general tone of American data releases remains soft in the near-term.

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