Greek debt worries weaken Euro. Again.

Tuesday 31st January 2012
Good morning. There were no UK data releases of note yesterday, so yet again exchange rates were driven by events in the Eurozone. Sterling gained against a broadly weaker euro ahead of an EU summit in Brussels, with investors cautious as talks continued between Greece and private creditors on a debt swap deal. This pushed GBP/EUR rates higher, but not by much and rates remain under €1.20. Against the US Dollar, the Pound fell slightly as the weaker Euro drove investment to the safe haven US Dollar.

~Currency Movements on Monday 30th January 2012~

Pound gains vs Weaker Euro

European Union leaders yesterday had a meeting to discuss a deal introducing a permanent bailout fund for the euro zone, the European Stability Mechanism (ESM), and finalise a fiscal compact that will introduce a balanced budget rule in national legislation.

However, this was overshadowed by negotiations on a debt swap deal in Greece, which has weakened the Euro slightly and pushed GBP/EUR rates higher. Greece must reach a deal with its creditors to receive a second rescue package and avoid a disorderly default.

In the absence of any significant UK economic data releases, this drove the market yesterday.

Pound gains against US Dollar

As regular readers will be all too aware by now, when there are times of economic uncertainty such as those currently faced by the Eurozone, the US Dollar tends to gain strength due to it’s safe haven status. Indeed this is what we saw yesterday, with the Pound losing ground against the Greenback, however we are only just below the recent 5 week high, and significantly above the recent 18 month low.

Today sees inflation data and consumer confidence measures for the states. Neither of these are likely to be very positive, so this could stop the Dollar gaining significant strength.

Pound to weaken as we get closer to QE?

Many market analysts, me included, expect the Bank of England will increase asset purchases under its quantitative easing programme in February. That is likely to weigh on sterling, although comments by BoE policymaker David Miles on Friday dampened the prospect.

Data releases this week for the UK will be watched very closely, as it is these that will influence whether the BoE indeed decide to opt for further stimulus next week.

Today’s Data

Starting in the UK we have Consumer Credit, Mortgage Approvals and Net Lending. Of more importance will be the EU unemployment figures released at 10am. In the afternoon we see Canadian GDP and Industrial Prices, and in the USA we see inflation data and a measure of consumer confidence.

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