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On Wednesday, Sterling was trading above 1.57 USD and the Euro was trading above 1.34 USD. On fundamentals, there seems to be disparity between the economic situation in the UK and Europe to justify the strength in their respective currencies.

No doubt economic data in the UK recently has exceeded expectations with GDP figures revised upwards this morning, PMI Services figures at their best levels for more than 6 years and glimpses of recovery in employment figures. In Europe, Germany has started to show signs of recovery with data out this morning exceeding expectations. German export figures were better than expected for the second quarter, capital investment and construction investment exceeded expectations thus showing recovery in Germany. Eurozone PMI figures out yesterday were stronger than expected but France continues to disappoint with data out yesterday showing their PMI figures below 50 (<50 in contraction) and lower than expected.

Germany is the powerhouse of Europe with their strong sense of work ethic and efficiency as well as their excellent manufactured products from Mercedes to Miele and BMW to Bosch. Their products and reliability are the envy of the world. However, Germany is not Europe! There are countries in southern Europe were productivity is poor and the relaxed attitude of long lunches and “siestas” are still common. With unemployment amongst the 18-30 year olds in Greece, Portugal and Spain above 50%, finding a job is extremely difficult for this disheartened group of young adults. Austerity measures in parts of Europe has resulted in many people being extremely unhappy and thus lowering productivity and resulting in depression and illness.

Things will no doubt get better for Europe but with an exchange rate of 1.34USD against the Euro, exporting goods to the rest of the world (countries pegged to the US dollar) is not easy. This level cannot be justified on fundamentals. Sterling, too is at a level against the US dollar where exports are not competitive and from a purchasing power point of view goods in the US are far cheaper than the UK. The difference in the price of goods between Europe and the US is even greater. Upcoming elections in Germany in the next few weeks is going to make the currency markets nervous as there is no clear leader. Perhaps this will be the catalyst for prolonged weakness in the Euro and strength in the US dollar? Continued geo-political concerns in the Middle East will further enhance the credentials of the US dollar and this will put downward pressure on the Euro and Sterling.

Further reading:  FOMC sticks to their guns