Euro hits 3 week high versus USD, GBP

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The euro’s rally continued yesterday as traders through their weight behind the belief that the politicians running Europe have finally come round to getting something done soon, to deal with the debt crisis. The EU’s President Barroso laid out a roadmap to address the crisis in the Eurozone during which he talked about a coordinated approach to bank recapitalisation in accordance with possible new rules of how much tier-1 capital the bank may have. If a bank requires more funds they would obtain these first by tapping private sources such as shareholders, then governments, and then loans from the European Financial Stability Facility if necessary.

Barroso also confirmed that Greece should get its 6th tranche of aid, as we reported yesterday and the EU should agree on a 2nd aid package the includes adequate public & private financing. One thing that has not been as frequently reported was his desire for the EU to intervene in national budgets; centralized fiscal policy via the back door, and something that we have been warning about for a good couple of months.

It was mainly the Greek news that boosted the single currency yesterday in the European session with it hitting a 3 week highs against the USD and GBP.

The other main news was the minutes from the latest Federal Reserve meeting during which the FOMC voted for “Operation Twist”. The committee said that there was “considerable uncertainty surrounding the outlook for a gradual pickup in economic growth”; with 2 members of the board saying that “Operation Twist” was not enough and that further monetary policy easing would be needed. This was countered by some who believed that an increase in asset purchases should only be used should symptoms of deflation become apparent in the US economy.

In the UK, as you would have seen, unemployment rose to a level not seen since 1996; a time when Gazza scored a wonder goal against Scotland, the IRA bombed Manchester City Centre and the OJ Simpson trial started. Long time in other words. Although the rise in unemployment to 8.1% is shocking there are some underlying reasons and knee-jerk reactions are never helpful. We expect some firms have cut older workers before new legislation makes it illegal for employees over the age of 65 to be excluded on the basis of age. Secondly, these job cuts were always expected in the public sector given the austerity measures. This will not quieten calls for austerity to be loosened in the face of falling consumer demand and business confidence however. Sterling was relatively unaffected by the news however and GBPUSD followed EURUSD higher on the day.

The outlook for today is quieter than yesterday but comments from European leaders surrounding a policy response could surprise. Speakers today includes EC President Barroso, EU President Van Rompuy and German Finance Minister Schaeuble,

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Indicative Rates Sell Buy
GBPEUR 1.1400 1.1426
GBPUSD 1.5726 1.5751
EURUSD 1.3780 1.3805
GBPJPY 121.16 121.41
GBPAUD 1.5425 1.5452
GBPNZD 1.9803 1.9828
GBPCAD 1.6034 1.6060
NZDUSD 0.7931 0.7937
GBPZAR 12.30 12.35
USDZAR 7.8160 7.8506
GBPPLN 4.8912 4.9255
EURJPY 106.14 106.41

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