European situation causes currency market chaos

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For at least one evening the European situation has not changed materially and with most of Europe off for a bank holiday today, it is unlikely to. The euro did eventually climb off the lows it had hit in the aftermath of the announcement of a secondary Greek election. The single currency does continue to look sickly however, this could be the beginning of a pullback as investors trim positions ahead of the weekend.

The one piece of news from Europe today that will move things is the confirmation of the Spanish GDP number for Q1. The Bank of Spain’s estimated it a couple of weeks ago at -0.3% but today is the official announcement. PMI surveys and other business measures put the figure a lot lower but we have learnt that there can be a significant disconnect between some surveys and official statistics; just look at the UK’s Q1 GDP.

The song remained the same from the Bank of England in regards to the UK economy yesterday. They expect inflation to return to target within 2 years; this was a pretty dovish hint by the MPC and caused a resultant drop in GBP across the board as traders started to re-price in further asset purchases.

On the problem of Europe, King would not be drawn on any particular solution (he has been told off for “lecturing” in the past) but made it clear that what happens in the Eurozone will have a very real effect on the UK economy. He also acknowledged that the BOE, Government and FSA have been drawing up plans to protect the economy in the event of a euro breakup.

Commenting on growth, Spencer Dale said that they do expect that the extra bank holiday due in June as a result of the Queen’s Diamond Jubilee could take as much as 0.5% off Q2 GDP while the Olympics could add as much as 0.7%. Growth will continue to bump along the bottom in 2012 as a whole though.

We also heard from the Fed yesterday who really didn’t give us anything new to work on when thinking about whether there would be more easing needed. Several members of the committee stated their readiness to take steps to help the US economy if slippage is seen, such as the weakness in recent jobs numbers. At the moment however, they need to convince more members of the economy’s plight before the vote will pass.

Apart from a Spanish bond auction at 0930 and US initial jobless claims at 1330, the schedule is clear for the day and we believe that the lack of new news will see euro recover slightly through the session.

Indicative Rates Sell Buy
GBPEUR 1.2480 1.2507
GBPUSD 1.5886 1.5910
EURUSD 1.2713 1.2737
GBPJPY 127.56 127.84
GBPAUD 1.5980 1.6006
GBPNZD 2.0737 2.0762
GBPCAD 1.6075 1.6104
NZDUSD 0.7653 0.7674
GBPZAR 13.13 13.18
USDZAR 8.2634 8.2931
GBPPLN 5.4122 5.4398
EURJPY 102.11 102.38

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time.

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