Outlook: Euro sun shines

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The Independent Online
Outlook: Euro sun shines

SPOTTING THE green shoots of recovery is a risky business. A hopeful tendril of growth can so easily be trampled or frozen by a late frost. But now there is a decent swathe of green it is pretty safe to conclude that summer is on its way over on the Continent. Yesterday's figures showing buoyant French consumer spending were not the first sign that the Euroland economy is past its trough.

This is not to say that all those euro-spenders are on the verge of a fantastically lush surge of growth. The performance in the first four or five months of this year was so disappointing that the weaker countries, Germany and Italy, would have to turn on a sixpence to achieve some of the more optimistic forecasts. They might see GDP expand by 1 to 1.5 per cent this year.

Even so, what matters to the financial markets is whether the gap between US growth and European growth will be narrower than the euro-dollar exchange rate had earlier priced in. And both sides of the gap have now shifted closer. For the Fed has made it plain it is going to slow down the US economy by raising interest rates. Although this could temporarily support the US currency, especially if it takes more than one rate increase to achieve, over a slightly longer horizon it will weaken it.

That this growth calculus is filtering through in the currency markets is evident from the modest recovery the euro has made this week. Big movements are very unlikely ahead of the FOMC meeting on Tuesday and Wednesday - this is no time be be making big bets on euro prospects.

However, after this week, further good news on the Continental economies could trigger bigger currency moves. For those heading to the sunny beaches of France, Spain and Italy there is little to lose from buying summer holiday cash now.

So far the pound has been stable against the dollar and strong against the euro, as always caught in the cross-currents between the more important currencies. But this pattern could change, depending on how growth and likely interest rates evolve in the UK. The pundits disagree on what the probable crossover of US and UK interest rates this week will imply. Some predict a flood of funds into dollars, while others see sterling as a haven from a potential Wall Street crash. The markets are voting against sterling, whose index has declined pretty steadily for two weeks.