The weekend headlines have revealed that Spain’s banks will
be given the support they desperately need through €100bn of emergency EU
funding. This is a decent signal of intent from the EU’s leaders; it buys Spain
some time and eases concerns surrounding spiraling debt contagion in the
eurozone, but it is far from a solution for Spain, never mind the eurozone as a
whole. Indeed, the enthusiasm following the weekend’s bailout agreement already
appears to have waned.
Growth-wise, eurozone data over the past fortnight has
pointed evermore towards a dip back into negative territory in Q2 of 2012.
Pressures are still very much being felt in the bond markets, with Spanish
10-year notes yielding almost 6.50% and Italy’s equivalent debt yielding almost
6.00%. Last week’s policy announcement from the ECB was notable in revealing
that the central bank is reluctant to cut interest rates from the current 1.00%
level. Perhaps more importantly ECB President Draghi is unwilling to step in
and buy bonds on the secondary market. The ECB has made it clear that it will
not fill the void left by the EU’s dithering leaders.
With Spain’s short-term pressures easing somewhat, the Greek
saga comes back into view. This Sunday (June 17th) brings the Greek
parliamentary elections, where there remains a significant risk of an
anti-bailout coalition emerging. Feasibly, we could see another stalemate and
another election called. The situation is incredibly uncertain and looks set to
put the market on edge as the event draws closer.
Bank of England decides
against QE, for now
Last week saw the Bank of England’s MPC decide against
introducing another round of quantitative easing in June. The threat of more QE
has been weighing on sterling of late, particularly amid a slew of weak UK
growth figures. However, a surprisingly solid UK services figure may well have
given some of the MPC policymakers the resolve to hold off on voting for more
QE last Thursday. The minutes from the meeting, released next Wednesday, will
clearly be very revealing on just how close the MPC’s call on QE was. For now
though, sterling looks set to find some favour – it’s safe-haven status should
be able to return to the fore as the Greek elections close in.
Elsewhere, US data has continued to point to a slowdown
in recent weeks, though Ben Bernanke was unwilling to provide any clues as to
the introduction of QE3 any time soon, which is dollar-supportive. He stressed
the risks posed by the eurozone debt crisis to the US economy but his rhetoric
smacked of a willingness to ‘wait and see.’
End
of week forecast
| GBP / EUR | 1.25 |
| GBP / USD | 1.5450 |
| EUR / USD | 1.2450 |
| GBP / AUD | 1.5800 |
Sterling is trading at €1.24, with the euro having totally
given back the gains it made on Sunday night as a result of the Spanish bailout
progress. Nerves look likely to intensify ahead of the weekend’s Greek
elections and as investors contemplate the possibility of a Greek exit from the
eurozone once again, we are looking for sterling to climb back up towards €1.25
in the coming sessions.
Likewise we are looking for lower levels for EUR/USD. The
euro’s relief rallies are proving more and more flimsy now as the debt crisis
goes on. Another look at $1.24 is a distinct possibility, but for now it trades
a cent and a half higher. A weaker EUR/USD pair will inevitably weigh on the
GBP/USD pair, which currently trades at $1.5530. Whilst we believe sterling should
be able to take a decent share of the safe-haven flows this month, we still
view anything above $1.55 as a bit lofty.
Greece votes in favour of the euro but market relief short-lived » « June 2012 Outlook Report
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