Exchange Rates and Market Commentary [16/02/2012]

Exchange Rates and Market Commentary [16/02/2012]

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 16th of February.

The drama over Greece’s latest round of rescue package continues. And this time the EU wants to ensure that Athens doesn’t renege on its austerity commitments after elections are held in April. Latest rumours suggest European Finance Ministers may withhold all or part of the bailout money while avoiding a bailout. What this means is that the €130 billion bailout money may be delayed though a small portion may be released to ensure the country meets its repayment obligations of €14.5 billion falling due on March 20. This resulted in angry reactions from Athens with Greek Finance Minister Evangelos Venizelos taking an indirect dig at Germany saying “there are some playing with fire, domestically and abroad.”

The situation deteriorated further as ratings agency Moody’s said it was reviewing some 114 European banks and financial institutions, including nine of the biggest UK banks. The overall GDP growth prospect of the eurozone remains weak with Q4 GDP contracting by 0.3 percent, driven downward largely by the Netherlands and Italy. The latest contraction comes for the first time since Q2, 2009 and unless banks start lending to businesses and households to increase consumption, the downward spiral will only continue. No amount of LTRO will help. Incidentally the Greek economy contracted by seven percent in 2011, further government spending cut certainly doesn’t augur well for the country in 2012.

Back home, the Bank of England’s Quarterly Inflation Report came in as expected. It said due to the ongoing EU uncertainties, the annual GDP growth will be ‘zigzag’ around zero percent. The inflation outlook however, remained high, forcing some analysts to revise their quantitative easing forecasts for the year.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2040
GBP/US$ – 1.5688
GBP/CHF – 1.4538
GBP/CAN$ – 1.5712
GBP/AUS$ – 1.4678
GBP/ZAR – 12.2076
GBP/JPY – 123.259
GBP/HKD – 12.1646
GBP/NZD – 1.8945
GBP/SEK –  10.5664

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EURO: The single currency fell against its global peers yesterday after news broke out that EU officials may postpone Greece’s bailout package. The EUR/USD pair ended the day lower at 1.3050 after opening at 1.3170 in the morning. The situation worsened overnight after Greek Finance Minister accused Germany of blocking the bailout money. The pair opens lower at 1.2995 this morning. The Sterling gained traction against the common currency yesterday closing at 1.2000. The upward journey continues as cable opens at 1.2050 this morning.

USD: Yesterday’s report by BoE on inflation caught investors unawares leaving them feeling the ‘short-squeeze.’ Governor Mervyn King’s forecast of inflation falling to 1.8 percent by 2014 against an expected 1.3 percent also raised doubts whether the central bank will increase assets purchase in April/May. The GBP/USD pair pushed up to 1.5710 post inflation-report despite opening lower at 1.5670. The report was optimistic about the economy bouncing back to 3-4 percent annual growth rate by 2013 onwards. Last night’s US FOMC statement was also dovish, dampening risk sentiments. The GBP/USD pair opens lower at 1.5670 this morning.

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