Calm before the storm?

mar bonnin palmer

Despite yesterday’s turmoil amazingly, the euro, the US dollar, the Japanese yen, the Swiss franc, and the pound start at almost identical levels to yesterday. It is possible that investors never really trusted the viability of the agreement that was announced six days ago and they see the Greek referendum as just one more possible road to perdition.

Over the last few days we have seen spikes in the market; GBP/EUR has gone above 1.1650 while the EUR/USD has dropped to 1.3679. The main reason behind this movement was the announcement of a referendum in Greece. The Greek population will decide whether or not they want to accept the terms of the bailout. If they vote not to go ahead with the austerity plans agreed Greece will most certainly default.

Mr Papandreou's proposal to hold a referendum was totally unexpected. It blew investors away. The euro fell across the board; two cents lower against the US dollar and the pound. The latest unemployment data for the Eurozone did not help the euro either. Jobless in the Eurozone has reached a demoralising 10.2%, this represents a jump of 188,000 between August and September.

Last night Greek Prime Minister George Papandreou won the backing of his cabinet to hold the controversial referendum on the Eurozone rescue package, saving his government for the time being. However is this the calm before the storm?! Today Sarkozy and Merkel summoned George Papandreou for crisis talks. The meeting will take place just 24 hours before G20 leaders gather for their summit in Cannes. Like the world's financial markets, the French president and the German chancellor must be desperate to know Mr Papandreou’s agenda. Watch this space….

Meanwhile in the UK; yesterday’s data showed the UK economy has grown more than forecast last quarter as Gross Domestic Product rose 0.5% beating forecasts that averaged between 0.3% and 0.4%. However economists warn that the growth is still below its long-term average.

More economic data helped to distract investors from the open sore of Europe's debt crisis. The pound fell as the latest UK manufacturing sector purchasing managers’ index, released at the same time as the GDP figure, came in at 47.4 in October. A reading below 50 indicates contraction in the sector. The GDP number is what is known as a lagging indicator, in that it indicates performance in the past, whereas the PMI data is a more current figure and will have a greater bearing on monetary policy from the Bank of England. Today the PMI data for the construction sector showed construction activity picked up unexpectedly last month to a five-month high as firms took on new work and increased their workforce. A survey also showed that while activity in the commercial and civil engineering sectors improved, housing construction activity continue to fall.

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