Single Currency Remains Well Supported Against Greenback

Single Currency Remains Well Supported Against Greenback

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 29th of February.

Today the market will wait for the second leg of the Long Term Refinance Operation of the European Central Bank in the latter half of the day. The first round of the LTRO was initiated by the ECB in the middle of December to ease the liquidity position of the eurozone banks. A total of 523 banks had borrowed €489 billion from the ECB at one percent and it was hoped they will invest the money in buying sovereign bonds, thus keeping borrowing costs down for the region’s peripheral economies. The banks were essentially conducting “carry trades,” borrowing at one percent from the ECB and lending to the governments at about 3-4 percent, thus keeping the margin. Unfortunately, part of the money was parked back with the ECB as banks were unwilling to take risks, thus defeating the very purpose of liquidity enhancement.

To gain bankers’ trust, structural reforms of the economies are required, at a fast pace. The latest round of LTRO opens a window that will last for the next three years, sufficient for the peripheral economies to get their houses in order before they can return to the capital markets. Will it be different this time and will banks buy sovereign bonds? Let’s wait and watch. Economics is as much about public finances as it is about politics.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.1839
GBP/US$ – 1.5939
GBP/CAN$ – 1.5825
GBP/AUS$ – 1.4739
GBP/ZAR – 11.93
GBP/JPY – 128.49
GBP/HKD – 12.2985

EUR: The single currency has remained well supported against the greenback ahead of the second round of LTRO due later today. The EUR/USD pair has risen to a high of 1.3485 overnight after closing at 1.3410 yesterday. Preliminary CPI numbers from Germany has also boosted the euro as Feb. reading rose to 2.5 percent against an expectation of negative 2.2 percent. CPI numbers for the EZ is also due today. The Pound remains a shade weaker against the euro this morning and the GBP/EUR pair opens at 1.1835.

USD: The greenback remains sold-off in the last 24 hours ahead of the next round of LTRO by the ECB. The second round has been estimated at €525 billion by various quarters, driving risk appetites higher. The GBP/USD pair has climbed to 1.5936 over the last 24 hours despite US Durable Goods Orders reading coming at negative 4 percent, the highest drop in three years as demand for commercial aircrafts and business equipments dropped. The GBP/USD pair opens at 1.5930 this morning as UK consumer confidence reading came in steady overnight. US GDP data is expected in the afternoon today.

Have a great day ahead!

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