Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 7th of June.
The European Central Bank is playing the waiting game. It wants the EU governments to take substantial log-term measures before it intervenes with short term remedies. The central bank has taken the governments to task on earlier occasions due to inaction. Three year into the crisis, its frustration is with the debt crisis is understandable.
This time the ECB is helpless because it doesn’t know how the Greek political deadlock can be broken or the Spanish banking mess can be fixed. Spain, on its part, continues to deny a bailout package for recapitalizing the region’s banks. The ECB has rescued governments time and again, but not before forcing governments to do what it thought was necessary.
The European Financial Stability Facility or its successor the European Stability Mechanism may be used to recapitalize the Spanish banks. Even the ECB agrees to the solution, but refuses to support it openly. Germany’s support seems conditional; it wants other concessions before saying yes.
The ECB would rather wait before a consensus evolves on a grand plan. That’s unlikely to happen before the end of June, if at all. Meanwhile, sit back and enjoy the game of brinkmanship.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2302
GBP/US$ – 1.5452
GBP/CHF – 1.4786
GBP/CAN$ – 1.5898
GBP/AUS$ – 1.5542
GBP/ZAR – 12.8178
GBP/JPY – 122.62
GBP/HKD – 11.9874
GBP/NZD – 2.0079
GBP/SEK – 11.0984
EUR: The ECB kept the benchmark interest rate unchanged at one percent yesterday without making any change to the monetary policies, as widely expected. The currency saw a near sellout following ECB chairman Mario Draghi’s press conference, but recovered against the greenback later in the day over rumours of an impending Spanish banking-bailout, which was later downplayed by Spanish officials. The EUR/USD pair traded higher amid better risk appetites and hopes of QE3 by Ben Bernanke after Operation Twist comes to an end this month. The GBP/EUR pair had hit a high of 1.2420 in early trade yesterday, but the relief proved short-lived as European equities rallied later in the day, pushing the single currency higher. The GBP/EUR is expected to take directions from the Bank of England’s rate decision today while Fed Chairman Ben Bernanke’s testimony on the US economy will drive the EUR/USD pair. The GBP/USD pair opens 1.2317.
USD: The cable benefitted from improved risk sentiment yesterday with the GBP/USD pair touching a high of 1.5515 before settling at 1.5475. Construction PMI reading for May came out a little higher than expected at 54.4 yesterday, though it was still the lowest in three months. The USD weakened further as the day progressed on hopes of QE3 on the back of abysmal jobs number last week. There can be heightened volatility in the market as Bernanke testifies on the health of US economy today. Back home the BoE is expected to keep rates unchanged though the economy has certainly deteriorated following eurozone’s debt crisis. The GBP/EUR pair opens at 1.5447 this morning.