ECB plan triggers euro
rally
Mario Draghi alluded to doing “whatever it takes” to save
the euro a month or so ago and at last week’s ECB press conference, he outlined
just what he meant by that. ‘Super Mario’ as he has been called, revealed a
plan that involves the ECB purchasing unlimited amounts of peripheral eurozone
nations’ bonds. This has already brought down Spain’s bond yields but as
Moody’s has warned today, this does not solve the crisis, it merely buys EU
politicians (and not the ECB) the time to address the region’s fiscal and
structural shortcomings.
The ball is now effectively in Spain’s court to
negotiate acceptable conditions of a bailout that would include ECB
intervention in the bond markets. So we are back to the familiar balancing act
of Germany extracting sufficient austerity measures without going ‘over the
top.’ This could potentially weeks but there is plenty to watch out for in the
interim.
Wednesday should bring the German Constitutional
Court’s ruling on the legality of the European Stability Mechanism and the
eurozone’s fiscal compact. The court is strongly expected to approve both
initiatives but a complaint made today by a German MP regarding last week’s ECB
bond-buying plan has raised the prospect of another possible delay to the
decision, which has ramped up market nerves again.
Wednesday also brings the Netherlands' general
election but the euro looks likely to be spared another political saga at this
stage, with the latest polls indicating a close race between two pro-Europe
parties.
QE3 could finally arrive this week
Going into last Friday’s non-farm
payroll figure the chances of the Fed delaying QE3 for the time being were
fairly well balanced but it now seems highly likely that Ben Bernanke will at
last pull the trigger on Thursday. Ironically, data did reveal that the US
unemployment rate did fall to a rate not bettered since January 2009.
Unfortunately as the employment change figure revealed, this was not because
more jobs has been taken up and will be of little comfort to the Fed. QE3 is
priced into a decent extent after Friday’s dollar sell-off but there is every
chance we could see another wave of risk appetite give the greenback another
knock this week.
Hints of a Q3 rebound for the UK economy
August’s PMI growth figures from the
manufacturing and services sectors were much better than expected last week. In
addition, data also revealed that UK manufacturing and industrial production
grew at their fastest rates in 10 and 25 years respectively, bouncing back from
June’s slump. This summer’s London Olympics also look likely to have made quite
a sizeable contribution to the domestic growth, which has caused many to revise
up their GDP forecasts for Q3. All this means that QE concerns should not apply
any weight to the pound for the next few weeks at least.
Although the euro’s upward climb has stalled today,
the prospect of QE3 from the Fed and a positive ruling from the German
Constitutional Court could well give the single currency some further strength.
This is likely to keep the GBP/EUR pinned close to or even temporarily below
the €1.25 level. Against the USD, matters are rather different as the pound
currently sits only marginally off a near-fourth month high. Renewed upside
potential for the EUR/USD pair could well help the GBP/USD hang on to these
gains in the short-term but we continue to expect a reversal in the coming weeks.
End of week forecast
GBP / EUR
|
1.2450
|
GBP / USD
|
1.6050
|
EUR / USD
|
1.2890
|
GBP / AUD
|
1.5300
|
Currency Analyst
Caxton FX
