investors wary to put money in euros

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We said yesterday that there was very little reason why the rally in risk from the Greek elections would not be faded by investors, we did think we might have got at least a day of positivity before the markets restarted their decline. The pressure has shifted from Greece and back to Spain with the latters’ bond yields hitting fresh 15yr highs above 7%. This only increases expectations that we will see some horrendous yields on the Spanish bill auctions due around 09.30 this morning.

Sentiment was not helped by the New Democracy party in Greece stating their desire to renegotiate the latest bailout package with a typical Merkel response of “there will be no loosening of the terms” also sending the market lower. If the nickname the “Iron Chancellor” had not already been snapped up, then it would be a fitting tag for the current German leader.

News out of the G20 was slight as the world’s leaders discussed actions against Syria yesterday although it is believed we may hear further headlines on Europe’s crisis later today. A draft communique was issued in the overnight Asian session but without containing any concrete proposals it was largely ignored. One positive was the increase in contributions from BRIC countries to the IMF’s war chest although the increase is from $430bn to $456bn and therefore nothing to really set your trousers on fire.

Although data has a limited impact on the market at the moment as it is drowned out by fears of the European debt crisis, UK inflation figures today will be interesting. While oil prices were rising, news channels went bananas for a petrol crisis but there has been no coverage of the 26% fall in the price of Brent crude since March. This, alongside the continuing lack of demand that fears over the global economy have created, has meant that inflation should continue to fall closer to target through the coming months.

What falling inflation also does is give the Bank of England further leeway with possible further expansionary monetary policy such as interest rate cuts or additional asset purchases. We expect tomorrow’s Bank of England minutes will show the decision to hold QE at the previous meeting was a lot closer than most expected.

Elsewhere we have the German ZEW economic sentiment survey at 10am which is expected to slip back from recent highs following the bunfight that has been the periphery in the past few months.

We expect markets to remain range bound this session as investors remain unwilling to throw too much tin at the markets before tomorrow’s Federal Reserve decision. We think that they will hold policy tomorrow and we could see a slip lower for risky assets as a result – see yesterday’s Sterling Update titled “Fed to feed the market soon” for further details.

Indicative Rates Sell Buy
GBPEUR 1.2418 1.2445
GBPUSD 1.5669 1.5793
EURUSD 1.2602 1.2625
GBPJPY 123.61 123.88
GBPAUD 1.5448 1.5476
GBPNZD 1.9767 1.9797
GBPCAD 1.6017 1.6047
NZDUSD 0.7915 0.7936
GBPZAR 12.97 13.02
USDZAR 8.2689 8.3138
GBPPLN 5.2911 5.3259
EURJPY 99.33 99.60

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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