Yet more talk but little action on debt issue
Little has come out of the recent EcoFin and IMF meetings, which is really testing the market’s patience. There have been rumours of a bolstered bailout fund but nothing concrete has emerged. Talk of substantial haricuts to Greek debt has also dogged the single currency. There is quite clearly recognition amongst officials both in and outside the eurozone that a failure to act decisively could have a catastrophic impact on the global economy. However, there remains a distinct lack of consensus on the path to be taken to resolve the debt crisis.
The eurozone economy has certainly been affected by the crisis, last week’s PMI data suggests that the region as a whole is on the brink of recession. In line with this slowdown and downside risks to eurozone inflation, speculation is increasing that that the ECB will be cutting its 1.50% interest rate. There have been contrasting comments from policymakers on the issue, but next week’s ECB meeting should provide some clarity on the matter. With investors still lured by the higher yield, a rate cut would doubtless hurt the euro.
Sterling still vulnerable to QE
Sterling has stabilised against the dollar for the time being, having dropped by over ten cents in the past month. The outlook remains fairly bleak against the greenback, however, which will continue to benefit from safe-haven investment in the current environment. Only a credible plan of action is likely to alleviate debt fears (the market has been repeatedly disappointed on this issue), global growth only appears to be going one way (down), and the associated declines in global stocks is always going to benefit the safer dollar.
In terms of domestic UK currency issues, further quantitative easing is the key issue, and looks very likely to weigh on the pound moving forward. The measure could be introduced as soon as next week’s Bank of England meeting. Noises out of the MPC have been more dovish than ever and the minutes of September’s meeting smacked of a precursor to monetary easing.
Against the euro, sterling’s prospects look a little brighter regardless of the threat of QE. Market confidence in EU officials is really ebbing and perhaps just as important are the potential stumbling blocks over which they have no control. The second Greek bailout needs to be ratified by eurozone parliaments and the Greek parliament needs to ratify a fresh round of Greek austerity measures.
This week brings relatively little by way of scheduled data releases. Market focus will remain on the debt situation in the eurozone then, and this is likely to throw up some significant volatility. Nonetheless, we are betting on further ‘risk off’ trading and net dollar gains.
Sterling is trading at €1.15 today and while major gains seem unlikely ahead of the Bank of England’s meeting next week, there is still some upside potential. Against the dollar, sterling is likely to remain under pressure and we cannot envisage any substantial sterling bounce in the current environment. With the gravity of the debt crisis increasing almost by the day, we are betting that the market will have to wait longer for any relief headline that may eventually come.
End of week forecast
GBP / EUR 1.1575
GBP / USD 1.55
EUR / USD 1.34
GBP / AUD 1.6050
