Eurozone concerns peak and the euro plummets
Concerns over the eurozone debt crisis have peaked in recent sessions, which has seen the key euro/dollar pairing decline by nine cents in the space of a fortnight. Fuelling this sell-off, which has also seen the euro hit a ten-year low against the yen, are intense fears of a Greek default. Greece is not meeting its deficit targets and unless sufficient austerity measures are implemented, then it may not receive its next tranche of aid.
German patience with Greece, which has been crucial in maintaining confidence in the euro, is clearly wearing very thin. Comments from politicians in the leading eurozone nation have alluded to a possible default and Greek exit. The market is now estimating that the probability of a Greek default within the next five years is 98%. A default and the effects it would almost certainly have throughout major eurozone nations such as Italy and Spain cannot yet be fully priced in. Accordingly, the euro has plenty of downside potential.
Importantly, we have seen Asian sovereigns withhold their previously reliable support for the single currency. Rumours of Chinese support for Italian debt stabilised the euro’s fall on Monday, but this seems highly unlikely to provide any sustained euro relief rally. Italian bond yields also soared at a debt auction today regardless. In addition, France’s main banks are facing further downgrades due to their exposure to Greek debt.
The ECB looks increasingly likely to cut its interest rate, which along with solid Asian support, has driven the single currency to such strong levels. The absence of these two factors and the worsening of the eurozone debt crisis have caused us to revise our relatively bullish outlook on the euro. The imminent threat of a Greek default and a collapse in the European banking system should ensure further euro weakening in both the short and longer term. The effect of eurozone officials’ habit of much talk and little action seems likely to ensure that any solution to the eurozone crisis will be very slow in coming and market scepticism is growing all the time.
Bank of England holds fire on QE
Last week saw the Bank of England decide against introducing further quantitative easing to the UK economy. Recent PMI data from the UK was very poor so the speculation for monetary easing certainly built ahead of last Thursday’s announcement. Next Wednesday’s MPC minutes will reveal just how close the BoE policymakers were to pulling the trigger. As ever, if figures continue to weaken, the measure will continue to threaten to weaken the pound.
Sterling is trading fairly strongly in the current risk-off environment, except against the dollar which has gained in safe-haven inflows since the Swiss National Bank’s intervention in the swiss franc’s strength.
After trading at €1.17 early on Monday morning, sterling is trading a cent and a half lower but the risks of further euro-weakening are all too clear. Against the dollar, sterling is trading down at $1.58 and is looking significantly more vulnerable. The key factor governing this outlook is an even weaker looking euro/dollar pairing, which looks hard pushed to make a sustained move back above $1.40 in the current environment.
End of week forecast
GBP / EUR 1.16
GBP / USD 1.57
EUR / USD 1.3550
GBP / AUD 1.5350
Richard Driver
Analyst – Caxton FX
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