The eurozone picture continues to brighten
Risk appetite returned with a vengeance last week. Global stocks rallied, and much of the dollar strength we have seen in recent weeks has been unwound. The key driver behind this is the heightened optimism surrounding the eurozone situation.
First, Merkel and Sarkozy promised to deliver a comprehensive plan to deal with the various fiscal and economic problems that have surfaced in the region. The weekend’s G20 meeting has produced a one week deadline to provide the package, which will deal with key issues such bank recapitalisation in Europe, Greece’s debt situation, eurozone growth and the region’s rescue fund. The market has been waiting for months for such an attempt at a long-term solution to the debt crisis, and sentiment has turned quite sharply positive in anticipation.
Greece’s second bailout deal, struck in July, allowed for a 21% haircut on the troubled nation’s debt. Germany’s finance minister has recently recommended that greater write downs be implemented, in order for Greece to be set upon a sustainable recovery. The haircuts could well head towards 50%, which demonstrates that there is still plenty of scope for sentiment to weaken in the near-term. Such a large-scale plan is highly unlikely to please everyone, the content and the extent to which it satisfies market players remains to be seen.
The German finance minister has today taken the edge off the euro’s climb, warning that this weekend’s summit would not come up with a “definitive solution” to the region’s crisis. Merkel’s spokesman has added that dreams of some sort of final solution are “unrealistic.” The commitment to decisive action has taken the euro a long way in the past fortnight, but these comments serve as a reminder that market optimism may be slightly overdone.
The week ahead brings some important German and eurozone economic sentiment figures, but as this morning has shown, really the focus is more likely to be upon unscheduled comments from EU officials.
The pound and dollar on the back foot
The dollar has come way off its highs in the past fortnight. Stronger US stocks invariably weaken the dollar and this has held true. The S&P 500 climbed by almost 6.0% last week. Some improved US retail sales figures have also contributed to improved confidence levels. Any major figure which suggests the world’s largest economy may avoid another recession will see funds redirected from the greenback.
Sterling’s status as a ‘safer’ currency, though far from a safe-haven, has seen it struggle in recent sessions. Concerns surrounding further UK quantitative easing have also weighed, but the pound’s decline has more to do with greater global risk appetite. The one positive for the pound though is that the extreme dollar to euro flows have seen GBP/USD climb almost five cents off its early-October lows.
Sterling is trading at €1.1450 today, and at 1.5750 against the US dollar. The euro/dollar pairing has retreated from this morning’s $1.39 high to trade a cent and a half lower. Another attempt at $1.40 looks likely to be made this week however, which should drag GBP/USD higher, and weigh on the GBP/EUR pairing.
End of week forecast
GBP / EUR 1.1375
GBP / USD 1.58
EUR / USD 1.3975
GBP / AUD 1.5250
Richard Driver
Senior Analyst – Caxton FX
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