Greek debt swap – how could it affect exchange rates?

Thursday 8th March 2012
Good morning. The Pound fell slightly yesterday against the Euro and US Dollar, as a fragile UK economy and weak technical outlook weakened Sterling. Today we will see UK and EU interest rate decisions, and also details on the Greek bond swap, which needed to avoid a disorderly default. We could see quite a volatile day for exchange rates. Today I will look at this in detail, after a snap shot of how rates move through the day yesterday:

~Currency Movements on Tuesday 6th March 2012~

UK and EU Interest Rate decisions today

It’s the first Thursday in the month, and so we will see the Bank of England (BoE) and European Central Bank (ECB) Interest rate decisions. I expect both central banks to leave rates on hold, and no increase in the Quantitative Easing (QE) measures from the BoE.

Despite no change in policy expected today, recent positive UK data have dampened prospects for more monetary easing from the Bank of England. This has helped the Pound gain in recent weeks against other currencies. However, with UK growth sluggish at best and inflation seen falling back towards the Bank of England’s target, more asset purchases could still be on the horizon, so don’t expect any significant gains for Sterling.

Greek debt swap today; crucial for Greek bailout

Today is the deadline for the Greek debt swap. This is where private sector bondholders, such as banks and pension funds, must agree to take a 53.5% cut in the 206bn euros of Greek bonds they hold. If they don’t, then Greece will not get its latest bailout of 130bn euros, meaning they may well suffer a disorderly default, which would be a disaster for the Euro.

75% of Bond holders need to agree, or no money for Greece. At the time of writing, 58% had agreed, falling short of the required amount. You can read more about the deal itself here on the BBC site. The deal is seen as determining whether or not the country can remain in the euro.

EU stocks have suffered this week on speculation the deal would not happen, and this had also weakened the Euro, helping rates climb to near the €1.20 level. Most analysts do expect the deal to go through. If it does, GBP/EUR rates could fall slightly. If it doesn’t, we could see further Euro weakness, although whether rates will climb much above the €1.20 level remains to be seen.

Either way it’s a crucial time for the EU debt crisis, and as such could cause some volatility in exchange rates. If you need to buy or sell Euros, contact us now to find out how the current situation may affect you, and what you can do to protect yourself.

Today’s Data

As always for the first Thursday in the month, both the UK and EU decide on Interest Rates, with no change expected. The BoE will also decide whether to expand the QE programme, but this is highly unlikely. Elsewhere, in the USA we see some Jobless Claims, and there is also an interest rate decision for Canada. Of course, the Greek debt swap deal will be very closely watched by the markets.

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