EU Cut interest rates, Greek farce continues

Friday 4th November 2011
Good morning. Sterling rose against the Euro yesterday and also rose from a 2 week low against the US Dollar, helped by the European Central Bank’s surprise decision to cut interest rates, which supported riskier assets. There is also uncertainty in Greece where there will now not be a referendum on the bailout, as the prime minister said he would scrap the move if the conservative opposition party voted to pass the bailout package in parliament. At 08:30am this morning rates are as follows:

GBP/EUR 1.1587
GBP/USD 1.5999
GBP/AUD 1.5420
GBP/NZD 2.0183
GBP/CHF 1.4165
GBP/CAD 1.6213
GBP/ZAR 12.5804
GBP/JPY 124.84
GBP/DKK 8.6226
GBP/NOK 8.9615
• EUR/USD 1.3803

ECB cut interest rates

The European Central Bank (ECB) surprised the markets yesterday when they cut eurozone interest rates to 1.25% from 1.5%. The new ECB president Mario Draghi told a news conference that growth in the eurozone was likely to remain weak. He said that Europe’s financial crisis and a slowdown in global growth meant the euro area faced an “environment of high uncertainty”.

Usually an interest rate cut would weaken a currency due to the lower return on offer, however in the current volatile market, the move actually supported riskier currencies, and the development that there will now not be a referendum in Greece actually strengthened the Euro slightly, and exchange rates dropped back in the €1.15’s.

Greece farce continues

The second day of the G20 meeting today will see the Greek prime minister George Papandreou face a confidence vote in parliament. The opposition have called for him to quit after his decision earlier this week to hold a referendum on the bailout sparked a turmoil on financial markets and upset both Germany and France.

Yesterday however he said he would scrap the move if the conservative opposition party voted to pass the bailout package in parliament. However, there are fears that he may lose the confidence vote and Greece may have to hold fresh elections, a move which may further delay the implementation of a Greek bailout package.

The mess in Greece caused some turmoil in the markets. Initially after the interest rate cut GBP/EUR rates rose but after the news from Greece, rates fell back away again as the threat of a referendum on whether Greece stays in the Euro subsided and calmed the markets.

Sterling still at risk however due to poor economic outlook

Despite the latest rise for Sterling, analysts said that the Pounds prospects are not looking very good, with the National Institute of Economic and Social Research lowering growth prospects.

They said there is now a 50% chance of a new recession and that is likely to ramp up expectations of more quantitative easing from the Bank of England in coming months. The Monetary Policy Committee will meet next week and the chances are it may consider more easing.

More QE would weaken Sterling and lower exchange rates.

Today’s Data

The G20 meeting continues today. From the Eurozone we have further inflation numbers, this time the Producer Price Index. In Canada there are Unemployment and Building permit figures. In the USA we will see Non-farm payroll & unemployment data.

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