All eyes are on Italy. Will Berlusconi pass a confidence vote today? I can’t see Mr Berlusconi going quietly and the thought that he’d willingly submit his resignation was far fetched. He’ll do anything to hold onto power. However, with Italian Government bond yields at 15 year highs Italy are now the debt crisis’s primary focus shifting the limelight away from Greece. With Italy under the supervision of the ECB to implement their proposed economic reforms market confidence in Italy is diminishing. If Berlusconi goes then the markets may see this as a sign of confidence with a new Government in place to usher in a wave of austerity measures. On rumours yesterday of this the EUR jumped to around the 1.3760 mark.
The lack of political decisiveness is quite staggering. The ‘debt crisis’ has been going on for almost two years with various officials over this time making profound announcements “we’ll tackle this” “we’re making progress” and the like. The simple fact is that the fabric of the Euro is close to falling apart. With such divergent economies there will always be economies within the 17 nation bloc that perform better than others. The stronger economies within this framework have to help their weaker partners however ‘they’ (Germany and France) have been unwilling to do so to this point. The leaders of each of the 17 nations are looking out for their own national and political interests and to limit the hurt to their people which goes against the whole ethos of the Euro when it was established that it would be ‘one union’ where each economy would, in time, come to the thinking that they’re all part of the one entity. It seems in times of trouble the human element of looking after one’s self interest is paramount. To this end the Euro has failed.
So, where do we go on this now? Greece, so long the focal point, seems to be playing ball. A new Prime Minister is expected to be announced shortly, with the front runner being Lucas Papademos. A former ECB vice president he may be seen by the markets as a steadying pair of hands. It is expected the current cabinet headed by Evangelos Venizelos will remain to provide continuity. I’d expect the Greek’s now to remain in the Euro and accept the austerity measures that will be placed upon them. If they did leave, then the snowball effect would be catastrophic. The two main issues are now Italy and leveraging the EFSF to a level that will act as a firewall to any future defaults. With Italy being the world’s 8th largest economy and having the second highest debt level within the Eurozone the need for swift action is crucial to preventing further market jitters. I’d expect further erratic behaviour on EUR crosses this week as there is no clear direction. Markets are again trading on commentary and rumour making it nigh on impossible to predict where currencies are heading.
The one beneficiary of the EUR turmoil has been our dear old friend Sterling with GBP/EUR trading close to 3 month highs. If you are a buyer of EUR then you should look to secure some of your exposure around these levels and limit your risk. A mixture of spot, forward contracts and market orders will spread your risk across the pair, limit your downside and potentially achieve any high’s through spikes in the market.
GBP/USD is now trading in a range between 1.5950 to around the 1.6140 level. If you can achieve the 1.60 level on buying USD you’ll be in a good position compared to the yearly average. Please contact to discuss.
The main focus today is 15.30 in Rome where the ‘vote of confidence’ will be announced. On other data today we are thin on the ground with the only figure of note to be released being the manufacturing data out of the UK in the form of industrial production and manufacturing production. GBP has weathered the recent market storms fairly well and has proved resilient. With investors being spooked with the Eurozone you may see a further strengthening in GBP against the EUR however there’ll be a lot of resistance at the 1.17 level. A lot will largely depend on the EUR/USD cross. If you have any questions on trading or how to improve your strategy for the remainder of the year please get in touch.
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