Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 1st of May.
The Ecofin (Group of finance minister from the eurozone) meets today to discuss the new bank capital rules that are expected to toughen banks defenses against future crisis. The EU finance ministers are meeting in Brussels to debate on the so-called Basel III regulation that mandates banks to hold greater Tier I & II capital, enabling them to withstand bigger shocks in future. The meeting is important as Spanish banks struggles with non-performing loans after the country’s real-estate bubble burst in 2008 though Spain may not feature in the discussions.
However, some differences have cropped up over capital issues. Britain, Sweden and their Eastern European allies want the freedom to impose higher capital requirements than Basel rules, should the situation demands so, while the Berlin-Paris bloc wants the member nations to adopt an even approach. Forcing banks to park higher capital would affect their appetite to invest in Europe, they argue. The two camps have also locked horns over whether banks should be allowed to count their insurance business capital to meet Basel rules. A Diplomat from the higher capital group said the German banks are under capitalized which Berlin wants to cover up.
Denmark has proposed a middle path that requires permission from the European Commission. However, London wants the European Systemic Risk Board – an economic risk oversight body, to get involved instead.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2270
GBP/US$ – 1.6219
GBP/CHF – 1.4749
GBP/CAN$ – 1.5992
GBP/AUS$ – 1.5692
GBP/ZAR – 12.546
GBP/JPY – 130.52
GBP/HKD – 12.579
GBP/NZD – 1.9908
GBP/SEK – 10.911
EUR: The 17-nation currency ended Tuesday lower as better-than-expected US ISM data lifted market sentiments. Also May day being a holiday in most of Europe, the single currency came under little pressure. The GBP/EUR pair fell to a low of 1.2195 on the back of lower-than-expected UK PMI numbers initially, but rallied little to settle at 1.2268. Tuesday being a holiday, there was no economic data due from the region and a slew of manufacturing PMI numbers is due from Germany, France and Italy today. Markets will remain focused on ECB’s interest rate decision tomorrow and the French and Spanish bond auctions. The GBP/EUR pair opens at 1.2270 this morning.
USD: The cable weakened against the greenback yesterday after UK manufacturing PMI tumbled to 50.5 in April from 51.9 in the prior month. Though British manufacturing is still in the expansionary territory – any reading above 50 denotes expansion, the drop was attributed to lower export demand. The GBPUSD came under further pressure after US ISM numbers threw a pleasant surprise, coming in stronger than estimated. The GBP/USD pair dropped 1.6186 and continued to trade in a narrow range for the rest of the day. The markets will focus on the UK construction PMI today and a weak reading is likely to push the GBP/USD pair down further. The ADP job numbers are due from the other side of Atlantic today and non-Farm payrolls are due on Friday. The GBP/USD pair opens at 1.6222 this morning.