Last week attentions on the foreign exchange market were focused on the US.
Following President Barack Obama’s decision to introduce a $1 trillion stimulus package, investors were busy analysing the consequences for the US economy. They concluded that though the stimulus could boost the recovery in the short term, it leaves worrying questions about the long term US deficit.
This morning though attentions have already returned to the EMU. Following negotiations between EU Finance Ministers and the IMF in which German Chancellor Angela Merkel vetoed every method of support for indebted EMU members – including creating common EMU government bonds – the markets are anxious about the euro zone situation.
For instance at the close of last week the price of insuring government bonds – known as credit default swaps – rose in Portugal above already dangerous levels.
This week the markets will watch two events in the euro zone closely to see how the EMU is fairing.
The first is a routine (and ordinarily mundane) sale of bonds by the Spanish government. If investors are unwilling to purchase then this could indicate that Spain is in dire straits and catalyse a crisis. Portugal though completed one of these sales without event two weeks ago, and things are expected to go smoothly.
The second event is the beginning of a summit of EU leaders on Friday. Investors will expect officials there to take decisive action – either by increasing the EFSF rescue fund or some other means.
But given this uncertainty the common currency remains volatile for the moment.
In the UK meanwhile there has been some less than heartening news this morning. The mortgage group Rightmove has announced a 3.0% drop in house asking prices this month indicating that demand on the housing market is weak. Since the housing market is an important indicator of the state of the UK economy this bodes poorly.
Furthermore this morning The Bank of England has reported that the £1.45 trillion pounds held in consumer debt has not come down.
This is in spite of low interest rates that (ordinarily) would be reflected in lower credit card interest rates. Yet banks have in fact added almost 1% more on credit card interest as officials interest rates have fallen – reducing potential savings in consumer debt.
These announcements may explain why the GBPEUR exchange rate has slipped a little this morning – hovering at the 1.18-1.19 mark.
Finally in the US today is expected to be quiet. Economists expect the Fed to maintain its program of quantitative easing, and the dollar could rise against occurrences in the EMU.
By Peter Lavelle with foreign currency exchange specialists Pure FX.
