Mario Draghi takes centre-stage

Mario Draghi takes centre-stage

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 5th of September.

Mario Draghi takes the centre-stage ahead of tomorrow’s Governing Council meeting of the European Central Bank. Though nothing has been finalised yet and Germany remains fiercely opposed to any sovereign bond buying program by the ECB, markets remain expectant. But will it work?

To have some sizeable impact on high borrowing costs, the latest intervention has to significantly large enough to dispel convertibility fears that have resulted in extreme divergence in bond yield across the north and south. The ECB can’t underwrite a one-way membership for the members, not least because the German’s oppose it while investors may use this opportunity to exit fearing Italian lira may turn as good as Zimbabwean bonds if Rome is eased out of the union.

Italy and Spain face unsustainably high borrowing costs that greatly hinder investments and hence economic growth. While Madrid and Rome argues high borrowing costs reflect convertibility risks, the north which benefits from low borrowing costs maintain it reflects Spain and Italy’s failure to maintain public finances and their inability to reform the economy.

Restrictive practices and protectionism (to hide inefficiencies) in the services sector is holding back growth. Labour market reforms undertaken by Italian Prime Minister Mario Monty and Spanish Prime Minister Mariano Rajoy are inadequate and have been dismissed by Italian employers as far too modest. Monty had to make a hasty retreat in the face of strong protests from special interest groups and trade unions despite making some initial progress. Pro-reform EU governments know what must be done, but they don’t know what should be done to survive electoral challenges to reap the benefits.


GBP/EURO – 1.2646
GBP/US$ – 1.5852
GBP/CHF – 1.5195
GBP/CAN$ – 1.5662
GBP/AUS$ – 1.5551
GBP/ZAR – 13.3442
GBP/JPY – 124.29
GBP/HKD – 12.2988
GBP/NZD – 1.9961
GBP/SEK – 10.6542

EUR: The single currency struggled against the greenback in early trading yesterday after ratings agency Moody’s downgraded the region’s outlook to negative from stable, but gathered strength as the day wore on to a high just short of the 1.26 handle after Draghi’s comment regarding a possible green light from the European Parliament to buy sovereign bonds of maturities three years or less. Italian and Spanish 10-year borrowing costs continued to slide, but the effect of the ECB President’s comments on short-end of the yield curve was more pronounced. The GBP/EUR pair hit a high of 1.2652 in late afternoon trading after starting just below the 1.2600 level as strong UK services PMI data was leaked in advance. We have euro-wide services PMI and retail sales numbers due today though markets are likely to stay focused on ECB’s policy meeting tomorrow. GBP/EUR pair opens at 1.2657 this morning.

USD: The cable rallied against the greenback yesterday after UK services PMI data hit the wires more than 18 hours in advance than was scheduled. The GBP/USD pair breached the 1.59 mark for the second time in four months after services PMI reading printed at 53.7 versus forecasts of 51.1, despite starting the day weak after Construction PMI data for August came in below estimates. With services making a robust recovery, it’s more likely that the Bank of England will leave interest rates unchanged in tomorrow’s policy meeting. The GBP/USD pair opens at 1.5849 this morning.

Have a great day!


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