Markets rally on Monti’s game of chicken

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The favourites took a kicking in a fair few competitions last night with Nadal crashing out of Wimbledon, Germany slipping against the Italians and Angela Merkel ceding ground to the periphery on the use of the EFSF or ESM to help shore up banks. The main concession that seems to have been made is that funds will not come readily attached with austerity measures as they did for places like Ireland.

The seniority of the debt i.e. whether the new bondholders jump to the front of the queue in the event of a default has also been sorted and while this may not provoke further peripheral bong buying it may allow the sellers to relax a little and therefore prevent further increases in yield.

So we’ve woken up this morning with an EU summit that has actually beaten expectations, although expectations were indecently low. Momentum now is key. In war, soldiers talk about not letting go of the enemy once you have got hold of them. Keep hitting them, harder and harder, over and over again. This is exactly what the EU need to do now and not rest on their laurels. Calling in support from the ECB would be welcome and we think that we see at least a 25bp cut from them at their meeting next Thursday.

The euro leapt on the news and is up around 130bps against the dollar while also gaining against the pound, yen and Swiss franc. Whether it continues or not is wholly dependent on the what mood EU politicians wake up in this morning. We have seen countless summits where there is an initial pop higher in risk as the market gets giddy over something and then the inevitable slump. The news overnight is good and probably good enough to sustain this rally for a couple of sessions but no longer than that we believe

News from elsewhere has been largely overshadowed by the European summit. UK Q1 GDP was confirmed at -0.3% yesterday with construction and industrial production the main drag. A separate number showed that real incomes continue to remain under pressure and therefore the upcoming Q2 figure is also likely to be negative. The extra bank holiday courtesy of the Queen’s jubilee won’t have helped things either.

That being said, currencies are hardly trading on fundamentals now; it is all about Europe and the demise thereof.

Trade today will remain Brussels focused and we would be looking to see the euro keep its gains so far.

Indicative Rates Sell Buy
GBPEUR 1.2410 1.2439
GBPUSD 1.5624 1.5648
EURUSD 1.2571 1.2595
GBPJPY 124.41 124.69
GBPAUD 1.5350 1.5377
GBPNZD 1.9571 1.9578
GBPCAD 1.6008 1.6036
NZDUSD 0.7977 0.7996
GBPZAR 12.96 13.01
USDZAR 8.2938 8.3235
GBPPLN 5.2799 5.3061
EURJPY 100.12 100.39

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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