Last week the European Central Bank succeeded in calming the exchange markets when it aggressively bought Portuguese and Spanish government bonds. These purchases tightened bond spreads in the indebted EMU nations and prevented the bond crisis spreading.
The ECB purchases though were a short-term measure designed to assure the markets while EU officials and EMU member states devise a more permanent solution. This month the markets will expect the EMU nations to announce a long term solution.
For instance over the weekend the Italian government raised the possibility of E-Bonds whereby members of the EMU would hold stake in a collective EU debt. This suggestion has been vetoed by the German government but raises the spectre of integrated fiscal union among EMU members.
Furthermore this morning the IMF has implored the EMU to boost its collective rescue fund in the event that Portugal and Spain require a bailout. This in turn has sparked recriminations inside the EMU that the IMF should contribute a larger amount to indebted member states.
In short the common currency is in a holding pattern at the moment until something permanent is announced. The ECB can continue buying government bonds to ensure indebted member states remain liquid for the moment but ultimately something permanent must be decided.
Elsewhere the pound benefited from some strong economic releases last week including positive manufacturing and construction PMI numbers. This could continue this week: December’s industrial production and trade figures are released on Tuesday for instance.
In addition on Thursday the MPC announces the monthly interest rate changes. The Bank of England isn’t expected to increase interest rates and is unlikely to increase quantitative easing (for the moment at least).
Finally in the US last week non-farm payroll data was pretty negative pointing to a shaky recovery for the country. In addition unemployment figures increase 0.2% to 9.8% in spite of efforts to restart the economy with quantitative easing. This morning for instance the Chairman of the Federal Reserve Ben Bernanke announced that QE3 was a possibility in order to drive down US unemployment.
In spite of these negative announcements the dollar is performing strongly against sterling and the euro this morning. This might be owing to continuing uncertainty in the EMU and the treatment of the dollar as a safe haven currency.
By Peter Lavelle with foreign currency exchange specialists Pure FX.