ForexSpace.com - Yesterday’s bombshell – certainly for the UK coalition government – that Britain’s economy contracted more than initially forecast failed to stymy sterling. Ordinarily, the economy’s Q1 shrinkage of 0.3 percent would weigh on the currency, especially as this signifies the UK in de facto double-dip territory. But with the growing crisis on the near continent driving forex traders to safer havens, and sterling’s domestic risk events now out of the way for the week, we can look to it to push on against the single currency in particular. Thus, sterling/euro touched €1.25 last night as the GBP put earlier sluggish retail sales and poor UK GDP data well behind it. Wednesday’s MPC minutes spared the pound of a QE-related sell-off, with only David Miles voting in favour of more QE in May. Caxton FX analyst Richard Driver is among many in remaining convinced that the market has not yet fully priced in the full scale of the threat that Greece is posing, both in terms of financial repercussions and other consequent euro-exits in the periphery.

So far this morning, sterling/euro is trading a touch down at €1.2450, but traders and brokers looking to top their week off with some profit taking continue to target higher levels as Greek concerns continue to spook the market. Certainly, as Caxton’s Driver points out, with little to look out for today in terms of key announcements, “the Greek issue looks likely to continue weighing on market sentiment as we move in the weekend.”

Cable down

In terms of cable, the GBP is nursing yesterday’s hangover, registering a 4.0 percent loss against the greenback this month, with further losses on the near horizon likely. It’s worth recalling how the pair started off the month of May trading at $1.63, whereas it now hovers in downward shift territory at $1.5650. This, Driver tells me, can almost entirely be put down to nervousness surrounding the Greek and wider euro zone situation. "Weakness in the eur/usd pair is going to make it very difficult for the pound to stand up to the dollar’s growing strength,” he insists, adding: “We may have to be patient on the EUR’s downtrend but we remain confident it will slide.”

Finally, since the markets are beginning to wind down ahead of the US Memorial Day weekend, we can return – naturally enough – to… yes, you guessed it, Greece. I’m indebted to currency guru Marc Chandler for bring this fantastic visual to our attention. Conjured up by the clever coneheads at Thomson Reuters, it depicts the Greek economy in comparison with the overall euro zone. 

“The fact that Greece so under-performed Europe since the onset of the crisis is well known and appreciated,” says Chandler. “However, it is noteworthy that Greece was generally under-performing even prior to the crisis,” Chandler adds, concluding: “The crisis has exacerbated the divergence.”

‘Greece is no tumour’

Furthermore, close scrutiny of the graphic suggests how the difference between Greece and the rest of the single currency bloc, is a question of degree not kind. Admittedly, a sufficiently quantitative difference can have a qualitative difference. The differences between Greece and the euro area tend to get most of the attention.  Investors may also find it helpful to consider what the two have in common.  The common element of Greece and many other countries in the euro area is the lack of international competitiveness. The debt seems to be "simply" be an expression of that fact.

“It seems somewhat politically naive to think that Greece can be removed like a tumor and the rest of the body politic will be saved,” Chandler says. “It is not the case that the Greek problem metastasized and that is what ails the rest: Portugal, Ireland, Spain, Italy and France have their own home grown imbalances.”

All of which unfortunately of course means if the Hellenic demi-paradise was not currently serving as the lightening rod, there are plenty of alternative candidates who would! 

Drew Hillier. Editor