European action increases euro decline

Unfortunately there has been no grand plan for the Eurozone announced over the weekend and as such it is the Eurozone which is still grabbing the headlines. Finance ministers meet in Luxembourg today at 16.00 BST ahead of another meeting tomorrow morning. No great policy announcement is expected here either however markets are skittish this morning and therefore susceptible to headlines emerging from these meetings.

Greece will naturally be on the agenda at this meeting with further cracks in the country’s economic viability showing over the weekend. Finance Minister Venizelos said Greece will not meet this year’s deficit target in part due to an estimated GDP contraction of 5.5% however Greece’s government approved EUR6.6bn in austerity measures over the weekend, including the measure to eventually reduce state employment by 30k. This is to try and make sure that the next IMF payment is forthcoming and stave off a Greek default in the near term.

From a sterling point of view, eyes switch to Manchester where Chancellor George Osborne speaks on the UK economy to the Conservative Party Conference this morning. He is expected to give a purely economic speech and leave the political tubthumping to his colleagues. As there is little cash lying round we’re not expecting grandiose gestures from the Chancellor but instead lay out his plan to further reduce the deficit and why foreign businesses should choose Britain to invest instead of somewhere like the EU for example. Sterling has chipped ahead this morning against the euro as Asian markets slipped overnight and the general atmosphere has turned to one of “risk off”.

It’s also a busy week for central bankers with both the ECB and the Bank of England meeting. The ECB on Thursday is expected to announce greater support for the banking system through the opening of further credit lines although we do not expect them to cut interest rates. There have been no firm signals from senior officials of an imminent rate cut, and CPI was verified at 3% on a year on year basis on Friday. This does not rule out a cut in the future as we believe one is necessary to alleviate pressures on the EU consumer.

For the Bank of England it is not interest rates that are in focus but instead qunatitaitve easing. September’s MPC minutes showed that most neutral MPC voters believed the decision to hold asset purchases at £200bn was “finely balanced,” and we believe, like we did last month, that Adam Posen will be joined this week in his call for a £50bn expansion in Gilt purchases. We think a majority will not be forthcoming however and we will have to wait until November for asset purchases to restart. This may act as a positive for sterling on Thursday as it seems that around 1/3rd of analysts are looking for some movement. We believe they will wait as between now and the November meeting we will have the details of Q3 UK GDP and the latest Quarterly Inflation Report.

Today’s data starts the PMI data run (UK manufacturing at 09.30, EU at 09.00) and the US ISM at 15.00. All are expected to show that conditions for the manufacturing sector are weakening.

Indicative Rates Sell Buy
GBPEUR 1.1630 1.1656
GBPUSD 1.5525 1.5549
EURUSD 1.3333 1.3356
GBPJPY 119.21 119.48
GBPAUD 1.6100 1.6123
GBPNZD 2.0395 2.0427
GBPCAD 1.6272 1.6306
NZDUSD 0.7599 0.7617
GBPZAR 12.55 12.60
USDZAR 8.0780 8.1134
GBPPLN 5.1320 5.1750
EURJPY 102.34 102.63

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