What is bad for Europe is ...profitable for pound?

Judging by the Governor of the Bank of England's comments, pound will go its own way, and is not going to decrease its rate along with everybody else
Last week, quarterly inflation report pushed GBP/USD above key levels, but again, the regular logic is not applicable to the royal pair. Judging by the Governor of the Bank of England's comments, pound will go its own way, and is not going to decrease its rate along with everybody else. Contrary to the general market tradition, which was formed over the last year, MPC thinks that all talks regarding pound interest rates can be associated only with increase. However, it is exactly now that common European problems can hinder it. History shows: the only thing that Greeks can do well is to have riots in attempting to banish anything financed from state budget. Everyone understands that issues regarding new subventions are quite resolvable (at least temporarily!), but yesterday's early closure of Eurogroup negotiations with regard to the Greek issue means that attempts to make the country live within its means are still unsuccessful. Over the last years, tons of funds were poured into that lazy country, and Europe's hopes to get at least something back are quite illusive. If Greece is not allowed to leave, then it will need to be tolerated and paid for again, with no clear plan for the future.

English analysts and crisis managers have identical opinions - Greece needs to leave Eurozone right now, most of its debts must be "forgiven" and it must never join Eurozone again, because the habit for a "freebee" will be eliminated only in a couple of generations. Greece has received a smaller number of British subventions as compared to those from ECB and Germany; however, when the patient leaves the zone of common funding, the impact on pound stability will also be inevitable. The Prime Minister and the Minister of Finance George Osborne have already spoken about the development of an emergency plan in case one morning banks will have to work with drachm again. It can be believed that the first steps will be as follows:

Heavy measures regarding limiting the growth of pound. It is not important what is expected on the market and what prices have been worked out. Britain can't allow that to happen. If Greece leaves Eurozone it will guarantee a fall of euro, and pound along with dollar and gold are the candidates for the role of haven. Investors will begin to convert capitals to the British currency, which will threaten 18% of the British economy, which depends on the export of goods/services to the continent. That is where rates and quantitative easing will be needed.

Active bank aid package. Stress tests showed that the English banks are able to endure practically anything. However, they have not been tested for Eurozone collapse and operation with new currencies, and it is not clear if Greece will leave through net default or will pay debts in drachm. Recapitalization plans are needed in case some of German and French banks collapse. In order not to waste funds for saving just anybody, it is good to know in advance who will have to be closed down immediately.

Development and implementation of the EU aid program for Greece. Before Greece runs for it to China or Russia. Euro will be trying to save itself from the chain of similar situations (Ireland, Portugal, Spain), and Greece (at least!) will need hard currency for essential needs. And Britain must be able to offer such funds in any volume.

Detailed preparation for trading in the new currency. City of London financial "know-how" is the best in Europe. While euro will be trying to punish Greece for stubbornness, the faster British banks adapt, the sooner pound will conquer the new market.

The current crisis is a great opportunity for pound to bargain some concessions from the EU. For some time after Greece leaves Eurozone, Europe will be busy with the restoration of control over the situation; that is why negotiations regarding the English financial sector taxes can be started, and if they are fruitful, Britain can even attain a comfortable reform of the Common Agricultural Policy.

It is always better to have a plan of neutralizing consequences in advance. Lingering negative inflation can ease the monetary policy in the future; however, a new statement regarding "many other variants" results in the fact that additional stimulation ideas are not discussed yet. Each doubting person must be confident that the Committee has both the will and the ways to reverse the inflation to the desired level.

Bids in the pair in the area of 1.5370/60 do not yet eliminate dismal mood. Because of closing at profit by long speculators, the penetration below 1.5340 will provide the fall to the current mid-term minimum in the area of 1.5280. Today's publication of January inflation, tomorrow's - of new Bank of England's protocols will evidently provide help to new impulses, which will have to be fixed through retail sales on Friday. Therefore, we will see in the nearest future how fast the English rally flows.

Author: Navsher Bartash,
ForexChief Currency strategist