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Expectations that the upcoming EU summit would bring about some form of solution, action plan or agreement to encourage a recovery in the Eurozone are falling by the hour it seems. As soon as the politicians stick their oar in the market gets antsy and this was exemplified by Merkel’s statement, made privately, that there would be no jointly guaranteed Eurozone debt “as long as I live”. While this is not a change in stance, the Germans are anti-Eurozone bonds and have been since the start, the language is certainly a notch higher on the intransigence scale.

Italy has been dragged back into the spotlight following Spain’s two weeks in focus culminating in a formal request for a bailout for its banking sector. Italy had to step in to buy EUR2bn of debt from Monte di Paschi, an Italian bank that is best known for being the oldest in the world and its wild moves on the Milan stock market. Unfortunately Italy is still borrowing at levels over 6% as well and therefore any move to help the banking sector is only adding more pressure on to the sovereign.

The political pressure in Italy has also increased in the past week or so as Mario Monti, the technocratic PM, has come under pressure following the continual deterioration in the Italian economy. This was made painfully clear in yesterday’s Italian retail sales number yesterday that showed sales down 1.6% in April. There are rumours as well that Monti threatened to resign should Merkel not cede some ground in the upcoming discussions.

GBP-EUR has done what we asked of it and slipped above the 1.25 mark this morning following a decent day for the pound. Chancellor Osborne’s decision to do away with the planned increase in fuel duty this autumn won’t have hurt things and means that the inflation picture may remain a little brighter as well.

Sterling normally takes one in the teeth when Mervyn King is speaking but in his testimony to the parliamentary select committee yesterday there was no such wobble. The Governor made it clear that while the Bank of England is worried about the problems within the UK economy it is the wider influence of the Eurozone crisis on places like Asia and the US that is provoking the most uncertainty. It looks a nailed on certainty that we will see some form of additional easing from the Bank of England at its July meeting and the market, and ourselves, are looking for anywhere between £50-75bn.

We are also looking for the ECB to ease policy next week and today’s German CPI number will likely confirm that following months of oil price decreases and struggling aggregate demand.

Into the meeting tomorrow we continue to like the euro weaker through the session with GBPUSD coming under pressure should we see further adverse moves in peripheral debt markets.

Indicative Rates Sell Buy
GBPEUR 1.2490 1.2510
GBPUSD 1.5614 1.5637
EURUSD 1.2492 1.2513
GBPJPY 124.42 124.72
GBPAUD 1.5522 1.5555
GBPNZD 1.9783 1.9815
GBPCAD 1.6003 1.6053
NZDUSD 0.7887 0.7902
GBPZAR 13.16 13.21
USDZAR 8.4150 8.4450
GBPPLN 5.2900 5.3180
EURJPY 99.38 99.62

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. The rate you will receive will depend on the amount and currency you require.

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