Any more extensions to Greece could be addictive “like a drug”

Any more extensions to Greece could be addictive “like a drug”

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 28th of August.

Following the meeting between Greek Prime Minister Antonis Samaras and German Chancellor Angela Merkel and an impassion-ate plea by Samaras for an extension to the deficit reduction target, fissures seem to be appearing within Germany. While Ms Merkel said she wanted Greece to continue in the currency bloc, German Bundesbank was more forthright with Athens. Opposing any extension to Greece and probable intervention by the ECB to purchase bonds, Bundesbank president Jens Weidmann warned that such measures could become addictive “like a drug.”

It’s high time we ask what comes next as whatever the final outcome may be, they will shape future European Integration. In the worst-case scenario, the debt-crisis may cause the Eurozone to implode. Fortunately, the region’s banks are better prepared to withstand credit events such as a Greek exit. Though the dangers of disintegration have diminished greatly, such an outcome can’t be ruled out completely.

That being said, it seems more unlikely that member states will be able to make a giant leap towards a more federal entity, the United States of Europe, where nations agree to surrender sovereignty on an unprecedented scale. On the contrary, ‘muddling through’ will remain the EU’s main approach in the short-term. Due to increased existential threat of the euro and constant scrutiny by markets, bold policy response will be required from the region’s weakest members. It is more likely that Europe will evolve a unique economic and fiscal integration model that includes binding deficit reduction of national budgets, greater economic and monetary coordination and some amount of debt mutualisation down the road. In short, “More Europe” will be required though the final result is impossible to predict as complex negotiations will involve opposing and divergent positions from within the EU and among other eurozone members.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2632
GBP/US$ – 1.5772
GBP/CHF – 1.5178
GBP/CAN$ – 1.5628
GBP/AUS$ – 1.5214
GBP/ZAR – 13.2712
GBP/JPY – 123.89
GBP/HKD – 12.2338
GBP/NZD – 1.9512
GBP/SEK – 10.3848

EUR: The single-currency managed to hold its ground yesterday despite German August IFO business sentiment reading declining for the fourth straight month in a row in a stark reminder that Europe’s biggest economy is not immune to the developments in the periphery. The euro managed to hold its ground probably on the hope of ECB intervention in the secondary markets to bring down borrowing costs of the peripheries. The economic data calendar is light on the ground today except for Spanish Q2 GDP, which is unlikely to attract much attention. Spanish Prime Minister Mariano Rajoy meets European Union policy maker Herman Von Rompuy today though the meeting is unlikely to have any bearing on the financial markets. The GBP/EUR opens at 1.2617 this morning.

USD: The forex market remained calm yesterday as most UK traders stayed away from their desks on account of Summer Bank Holiday. The GBP/USD pair remained range-bound in the absence of any tier-1 economic data from either side of the Atlantic. There’s not much economic news due today as well and the currency pair is expected to trade on speculations of further monetary stimulus from the US Fed. The GBP/USD opens at 1.5782 this morning.

Have a great day!

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