EUR continued its surge yesterday on optimism of the announced deal from the EU coupled with positive GDP data out of the US which saw a weakening of the USD pushing EUR/USD to fresh highs. Will this rally continue? It may short term in today’s trading however once the market settles and gains access to the fine print I feel the view on the EUR will change. It has been a positive reaction from the EU in dealing with the debt crisis however there are still many unanswered questions. China has now come into the equation. There is talk (again nothing concrete) that China may look to bolster the EFSF in a special vehicle with the IMF. Chinese Vice Finance Minister, Zhu Guangyao, has said that discussions are ongoing on a potential investment in the rescue package for the Eurozone from his nation.
The Greek PM, Papandreou, has said that the bailout has given his country “opportunity and this agreement gives us time”. Yes, a large portion of debt has been wiped off the Greeks books however further austerity measures and structural changes need to be implemented. There is going to be further pain for the people of Greece and I’m just not sure Greece will be able to overcome their debt. I don’t see the economy as having much potential for growth at all. With the losses incurred by bondholders it’s possible, however its just within the realms of possible, that Greece may be able to sustain their debt over the next decade. However, I feel the targets that have been set and objectives are optimistic to say the least and I fear yet another ‘package’ will be unveiled in time.
GBP/USD is trading higher on dollar weakness so if you’re a buyer of USD you’re at the highest levels in over 2 months. There hasn’t been too much positive news out of the UK so Sterling is largely dependent on moves in other currencies. We had UK consumer confidence out that showed it’s at its lowest level since 2009. Consumers are now trying to pay down debt, hoard cash and resist the temptation to spend on luxuries as they are having to tighten their belts as inflation has increased to 5.2% meaning a basket of goods is now far more expensive than it was even a year ago.
GBP/EUR has come off in recent trading due to EUR strength. As I said last week, I feel 1.15 is toppish on this cross. If you have exposure on this cross you should look to cover your exposure at intervals from 1.1350 up to the 1.15 level to limit your downside risk – contact to discuss.
We are very light in terms of data today with nothing of note to report out of the UK and Eurozone. This afternoon we have data out in terms of Core personal consumption expenditure, personal income and the Reuters/Michigan consumer sentiment index. The Dollar has come under pressure in recent trading so these figures, although not tier 1 data, may move the USD this afternoon.
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