The sugar hit from Ben Bernanke’s hinting at further asset purchases by the Fed in the coming quarters, has faded in the past 24hrs with fears over the European debt situation coming to the fore once again. Equity markets have slipped overnight in Asia and futures are showing that Europe will follow them into the red.
Once again it is the movement of peripheral bond yields that is causing people to become nervous on Europe. Yesterday saw both the yields on Italian and Spanish debts slip higher on fears that austerity will lead to lower growth. There is also a growing disquiet around the ECB’s liquidity operations as more and more people become aware that the loans simply buy time and do not represent a solution to lingering fiscal issues. This is nothing new to us or readers of this update so we have look at it as an example of ‘the story remaining the same’.
There are also fears that the likely combination of EFSF and ESM to boost the European protectionary fire wall may not be enough should Italy and Spain fall into further troubles. It currently sits at around EUR720bn. We think it is necessary that we remove around EUR150bn out of this figure to provide for further bailouts for both Greece and Portugal. Once removed, we are sure that it would only be enough for Spain, and not Italy, and once done the cupboard would be bare.
UK data comes in the form of the final summary of Q4 GDP to be published at 09.30. Our expectations of upward revisions proved to be wrong although it has now become clear that, barring some monumental slip in March, Q1 GDP should be positive and above 0.3%.
This may not last however, as was emphasised by BOE Chancellor Mervyn King. During Q2, we of course have the Queen’s Diamond Jubilee and with it comes an additional UK bank holiday. While workers will be glad for a sunny June day during which they can relax it does mean that we will see a dip in UK output. A similar result originated from last year’s Royal Wedding.
Sterling was rejected from the 1.60 level versus the US dollar on the back of the risk averse flows seeing the USD find some strength in the afternoon session. We would anticipate that it will not make a break of 1.60 this week but this is definitely possible in the coming weeks. GBPEUR remains range-bound.
Indicative Rates Sell Buy
GBPEUR 1.1908 1.1938
GBPUSD 1.5912 1.5936
EURUSD 1.3343 1.3368
GBPJPY 131.52 131.75
GBPAUD 1.5242 1.5267
GBPNZD 1.9399 1.9406
GBPCAD 1.5838 1.5867
NZDUSD 0.8190 0.8211
GBPZAR 12.09 12.14
USDZAR 7.5929 7.6327
GBPPLN 4.9360 4.9640
EURJPY 110.24 110.49
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