The elusive silver bullet, the Euro and Sterling - Business Works
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The elusive silver bullet, the Euro and Sterling

Richard Driver of Caxton FX T uesday’s meeting between eurozone finance ministers produced some progress on plans for the European Financial Stability Fund (EFSF), but we at Caxton FX still believe that the 'silver bullet' solution remains elusive.

In this, the first editorial of a regular series from Richard Driver of Caxton FX, he looks at the current EU situation and the future for Sterling and the Euro.

The market is still sceptical towards the news of progress on the EFSF, but the issues that remain unaddressed continue to weigh on both market confidence and appetite for the single currency.

The agreement that the EFSF will guarantee up to 30% of new bond issues from the eurozone’s struggling nations is a positive, but this simply isn’t enough. The market is still looking for the 'bazooka' measure which is really going to get to the heart of the debt crisis.

Interestingly, it is what has not emerged from the meetings thus far that is worrying the market, as there is no detail as to how much the EFSF will be leveraged and how the IMF will be involved.

With Italian bond yields recently verging on 8%, the European Central Bank’s current approach to bond-buying is clearly insufficient and needs to be addressed.

With a eurozone recession now almost inevitable, one question which remains untouched is how EU leaders intend to get growth back on track in the region.

Eventually, we really need to be seeing greater fiscal integration through a common eurozone bond; this is the only silver bullet solution we can identify.

All eyes turned to George Osborne’s Autumn Statement on Tuesday, but, as the Office of Budget Responsibility confirmed, Britain’s future is closely tied to what is going on in Europe.

George Osborne was undoubtedly gloomy about the UK’s economic prospects for the next couple of years, but the market has already factored this in.

The normal drivers of growth and possible rate hikes are not why Sterling is climbing. UK gilts are the key factor supporting sterling and they will continue to do so; the debt crisis will roll on for a long time yet and appetite for safer assets is likely to build.

Regardless of further Bank of England quantitative easing, we see GBP/EUR up towards €1.20 moving into 2012, and beyond that €1.30.

Richard Driver is a Currency Market Analyst at Caxton FX and can be contacted via:

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