Cheap Money Transfers to Europe & America Suffer as GBP EUR & GBP USD Fall

The pound fell against all 16 of the most actively traded currencies at the start of the trading week despite the lower trading volumes caused by the closure of the US markets for the Presidents Day public holiday.

The catalyst for the latest falls seems to be the words of Bank of England Monetary Policy Committee member Martin Weale who in a speech at the Warwick Economics summit at the weekend spoke at length on the different mechanisms by which the UK’s current account deficit might be reduced with particular emphasis on the circumstances under which the “current exchange rate” might come under pressure and what the implications might be for the Bank’s monetary policy.

The markets certainly focused on the comment that “the final, and perhaps most natural, means of resolving the problem is for the nominal exchange rate to fall. To sum up, I certainly see that there would be a strong case for treating the effects on inflation of any further depreciation similar to that experienced in the last few weeks in the same way. To do any different would be to veer towards deflation as a means of restoring external equilibrium. But I should stress that this point is quite different from saying that I would be unconcerned about the effects of a sharp depreciation in Sterling on prospects for inflation.”

By contrast, in the euro zone, the German central bank, the Bundesbank reported in its latest monthly report for February that it notes signs of an improvement in the global economy and expects that the German economy will register growth in the first quarter after the contraction seen at the end of last year.

The German central bank commented that there have been “increasing signs in recent months that the global economy is gradually picking up momentum” and pointed out that economic expectations in Germany have recovered “to a remarkable degree over the past three months.” The Bundesbank further explained that the “marked turnaround in sentiment” was due to the reduced levels of uncertainty in the euro zone.

In Italy however, as we enter the last week of campaigning, investors are keeping a close eye on the latest opinion polls. The Italian elections take place on 24 and 25 February. The latest polls suggest a victory for the pro-European centre-left that would most likely form a government with the current Prime Minister Mario Monti’s group.

Analysts at Credit Suisse points out that there are “several alternative and sub-scenarios that cannot be dismissed” which leads the broker to the conclusion that the “Italian elections remain a significant risk event”.

In its research report, Credit Suisse highlights the uncertainties related to at least three issues “First, to the progress of Silvio Berlusconi's centre-right group in the polls in recent weeks; secondly, to the trend in the protest vote, which has been rising again in the last couple of weeks according to the polls and thirdly, even if the centre-left does manage to reach an agreement with the centrists, it is still unclear if the government would have sufficient seats to form a solid majority, and if the coalition would be sufficiently stable.”