UK inflation number at 2.8 percent lowest since Nov 2009

UK inflation number at 2.8 percent lowest since Nov 2009

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 20th of June.

There has been a feeling that the proposed European banking union is a reality that will take shape soon. In an interview to the Financial Times last week, Jose Manuel Barroso, the European Commission president, said such a union involving deposit guarantees, regulatory supervision and bailout funds could be achieved as early as next year.

The hurry to form a banking union is understandable. The link between governments and lenders, dubbed as sovereign-bank doom loop now, can sink governments when they need bailouts. Similarly weak sovereigns like Greece, which have stuffed their banks with own government papers, can drown their banks. By spreading the bailout responsibility to other members in the eurozone, this nexus can be broken.

However, that may not come soon. Taxpayers are unlikely to agree to bear the bailout burdens unless parts of Europe, with rotten banking rules, are cleaned up first. The rot runs deep nonetheless. For example, the ex-chairman of Bankia was a former finance minister. Many of the Spanish cajas made dubious loans to their directors and funded politicians’ pet projects. A similar story was played across Cyprus, Greece and Ireland. Even Berlin has suffered from incompetent regional-government controlled Landesbanken whose board of directors are stuffed with political appointees.

Then of course, remains a need for policies to bail bondholders out. A draft, proposed by the European Commission this month, is likely to come into effect in 2018. Also the vexed issue of funding government debts if their banks are insolvent, remains to be solved yet.

It will be years before the proposed banking union sees the light of the day.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2393
GBP/US$ – 1.5726
GBP/CHF – 1.4891
GBP/CAN$ – 1.6026
GBP/AUS$ – 1.5429
GBP/ZAR – 12.8865
GBP/JPY – 124.16
GBP/HKD – 12.2061
GBP/NZD – 1.9775
GBP/SEK – 10.9615

EUR: Yesterday’s UK inflation number at 2.8 percent was the lowest since Nov 2009 and was below analysts’ forecast of 3 percent. The GBP/EUR pair slipped to 1.2376 as investors wondered if the Bank of England will initiate another round of assets purchase to prop the economy up in July. The cable was also hindered by a firm euro against the USD, boosted by a better-than-expected Spanish T-bill auction for 12-18 month notes, albeit at higher interest rates than the last auction in May. The EUR/USD hit a four month high after Spanish 10-year bond yields dropped from their euro-era high over 7 percent posted on Monday. Comments from an EU official that Greek debts may be renegotiated to buoy the debt-ridden economy, thereby making a chaotic exit less likely, also bolstered sentiments towards the single currency. However, it was not all good news as German ZEW index reading, the barometer of business sentiment for Europe’s strongest economy, posted its steepest decline in 13 years on concerns over Spanish banking system and insecurity over Greece elections. However, with a Greek coalition government seemingly being close to reality now and expectations of another round of QE by the Fed today evening, The single currency may rally further. The GBP/EUR opens at 1.2405 this morning.

USD: The GBP/USD pair dipped to 1.5616 after the CPI report showed inflation has hit a 2-1/2 year low in May. However, the cable ended the day much higher at 1.5730, spiking to 1.5757 following Bank of England’s first Extended Term Collateral Repo auction announcement. The markets accepted the news as a positive for the UK economy though some may view it as an indirect liquidity injection. The greenback came under some selling pressure on Tuesday ahead of the Fed’s FOMC meeting announcement today evening. Markets may turn choppy today after the Bank of England minutes are released today morning and the markets are pricing in a fair probability of extension of the Fed’s Operation Twist, which in turn will benefit the Pound. The GBP/USD pair opens at 1.5731 this morning.

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