EU Summit made progress but Greece drops a bombshell
The European debt crisis has dominated market sentiment over the past few weeks but last week saw some progress made. The EFSF (bailout fund) is to be leveraged and expanded by almost five times (to €1trn).There is to be a €110bn recapitalisation of Europe’s banks, and there is to be a 50% haircut on Greek bond holdings. The market received the plan positively but confidence has since waned and the euro’s gains have been reversed. There remain major question marks, such as how the fund will be leveraged, and how EU leaders intend to get eurozone growth back on track.
But most alarmingly, the Greek situation has hit the headlines once again, with Greek PM George Papandreou allowing a referendum on last week’s €130bn bailout package. This is a real revelation and the prospect of a messy Greek default is very much back on the table now. The euro has given away over five cents to the dollar this week already, mirroring sharp losses in global stock markets. In addition, Italian bond yields are consistently hitting fresh euro-era highs.
The market awaits clues as to central bank monetary policy
Also in focus this week are monetary policy decisions from the US Federal Reserve and the European Central Bank. The Fed looks unlikely to announce QE3 at its meeting this Wednesday. Particularly on the back of last week’s stronger than expected GDP figure, which showed the US economy grew at an annualised rate of 2.50% in Q3 2011. Forward looking US data is nonetheless pointing towards a slowdown, and the market remains hopeful for another round of QE from the Fed. First quarter 2012 remains a decent bet, which is likely to weigh on the US dollar in the long-term.
The European Central Bank will meet on Thursday, which will be Mario Draghi’s first as President of the central bank. There is a chance of an interest rate cut but our bet is that with inflation at 3.0%, we may have to wait at least a month for the ECB to loosen monetary policy. The real driver of the euro is likely to be how the Greek crisis progresses from its latest negative turn.
Q3 UK GDP impresses but the market wasn’t fooled
Estimated UK growth data for the third quarter was 0.5%, above expectations and well above Q2’s 0.1% figure. Sterling has failed to rally however, as the simultaneous release of October’s manufacturing PMI growth pointed to a very gloomy Q4 performance. The figure was the worst in over two years and triggered major concerns about another UK recession and further QE from the MPC.
Sterling is trading just above €1.1650 today, which is close to a three-month high. This week looks set to be a tough one for the single currency, and although there are downside risks posed by this week’s UK services and construction growth figures, GBP/EUR may continue to trade strongly this week. In line with renewed Greek concerns and plummeting global stocks, we are likely to see the safe-haven dollar outperform both the euro and the pound in coming sessions. Friday’s US Non-Farm payroll figure could well reveal further fault lines in the US recovery and intensify risk averse trades. Major headlines out of the eurozone, as ever, will trump fundamental data, but these are proving more unpredictable than ever.
As ever, views are very welcome!
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
