Central bank week starts quietly

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And so starts another important week in the life of the European, and world, economies. We are stuffed full of central bank news with markets hoping that the rally caused by Draghi’s comments late last week will be continued by some form of monetary policy easing.

Our thoughts are that the Fed and the Bank of England will sit on their hands while the ECB will have to at least give the market something if they want this rally to continue. Whether this is talk about increasing Spanish and Italian bond holding, easing collateral rules or further LTRO issuance we will have to wait and see but a failure to do so will see this rally crumble before our eyes.

News has been quiet over the weekend although the UK was given a shot in the arm halfway through the Olympic opening ceremony as S&P reiterated its AAA rating on the UK economy with a stable outlook. Whether it was the 40ft Voldemort that did it we’ll never know but it has certainly softened the blow of last week’s UK GDP number slightly.

Two notes of caution however; firstly S&P is the ratings agency most bullish on the UK’s prospects. Both Fitch and Moody’s currently operate negative outlooks i.e. balanced towards a downgrade at some point in the future. The second is that with current GDP running 0.2% below where we were when the coalition took power, pressure on Chancellor George Osborne to somehow move to some form of Plan B will increase. If this involves some fiscal loosening (relaxation of austerity) then the pressure on our rating will also increase.

In Europe, it is Spain in focus this morning with the release of the latest GDP number for Q2 expected to show a deeper dip than had been previously forecast. There is a meeting between Rajoy and Monti later in the week and while this may be an opportune time for both parties to request aid, it will not solve the immediate macro-economic pressures.

An Italian bond auction later in the day is expected to pass without a hitch.

General market picture so far this morning is mixed but we expect to see a pick-up in European prospects into the ECB meeting on Thursday.

Indicative Rates Sell Buy
GBPEUR 1.2772 1.2801
GBPUSD 1.5690 1.5714
EURUSD 1.2268 1.2292
GBPJPY 122.93 123.19
GBPAUD 1.4985 1.5012
GBPNZD 1.9409 1.9436
GBPCAD 1.5761 1.5790
NZDUSD 0.8073 0.8095
GBPZAR 12.81 12.86
USDZAR 8.1596 8.1943
GBPPLN 5.2672 5.2999
EURJPY 96.08 96.33

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