At the start of the year the headlines were full of concerns about the Euro, especially the southern states inability to cope with the mountain of debt and the ECB inability to prevent a total loss of confidence.

 Well we are now on the third roll out of a rescue fund/bailout package, (call it what you like) and indeed Greece, Ireland and of course Portugal, who have yet to ask but certainly do need a bailout to help with their imminent funding requirements, are struggling to make headway and are facing a possible default in the coming months on their debt obligations.

However the Euro hasn’t plunged on the back of these fears, in fact it’s been one of the best performing currencies this year. So what’s been fuelling its resistance?

Well like anything in life it’s not always the facts that matter and the market's decided that the southern states will remain a debt basket case, like a mad auntie who no one will notice as long as you can lock her away in the attic!
Instead the markets have concentrated on the growth coming out of Germany and France which indeed is moving along at a great pace. The problem is though, that this growth has seen inflation move about the ECB target of 2% and as the ECB are inflation hawks they will raise rates in April to combat the growing inflation rate, completely ignoring the raging debt problem they cannot seem to control.

The Euro is moving higher on the back of this as the economic outlook in both the UK & US means it’s highly unlikely we will see any rate rise in 2011 and it wouldn’t surprise me if we see Euro/Dollar at $1.50 before the summer is out.

In the UK George Osborne’s latest budget is over optimistic to say the least. Inflation continues to move above 4.5% but the Bank of England refuse to raise rates as they believe the inflation is temporary and will fall sharply as we end the year.

I must disagree, I think the situation in the UK will worsen, inflation will remain high and growth will weaken – known as “stagflation.” And if we see stagflation there could be some very tough times ahead for Sterling.

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