Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 27th of June.
As Spain’s borrowing costs remain stubbornly high with both short- and medium term yields hitting new highs almost every day, it has become imperative for the EU leaders to come up with comprehensive and credible roadmap for better political and fiscal union when they meet for tomorrow’s summit meeting in Brussels.
Since Madrid is unable to convince the markets and is on the brink, a grand plan that can be implemented quickly is required. There’s no time to test the alphabet soup; plan A, plan B etc, unless they wish Spain to leave the euro.
The EU leaders must send out a strong message to investors that it’s working hard to keep the currency union together, and not the other way round. To begin with, a full blown banking union, as suggested by ECB’s Mario Draghi and French President Francois Hollande, may be announced this week. Angela Merkel may not approve it without a political and fiscal union. France, which has historically refused sovereignty transfers, should find it acceptable, even if they have to accept certain structural reforms.
The other challenge will be slowing the pace of austerity measures to stop the bleeding of Spain, Greece, Ireland and Portugal. Budget deficits must be slashed, but indiscriminate government spending cuts and higher taxes impede growth and harms competitiveness. Fiscal targets should be deferred to ease the blow.
Tomorrow’s success depends on euro zone leaders’ capacity to convince Berlin that its money will not be wasted on irresponsible states.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2506
GBP/US$ – 1.5630
GBP/CHF – 1.5026
GBP/CAN$ – 1.6024
GBP/AUS$ – 1.5548
GBP/ZAR – 13.1824
GBP/JPY – 124.31
GBP/HKD – 12.1234
GBP/NZD – 1.9792
GBP/SEK – 11.0421
EUR: The single currency lost ground against sterling yesterday, hitting a four-week high of 1.2523 although the cable failed to make any headway against the greenback. The euro weakened following reports of Spain being forced to pay nearly three times more for short-term debt than the last auction. Italian auction results were less severe though Rome paid considerably higher, indicating investor uneasiness with the EU region’s third largest economy. The economic data calendar is light today with German CPI number due later today. A low reading may encourage the ECB to cut rates next week. The GBP/EUR pair opens at 1.2500 this morning.
USD: Markets remained fairly week on Tuesday in the absence of Tier 1 economic data. UK public finance reading showed public sector borrowing increased in May while the BoE MPC members’ testimony at the Treasury Select Committee hearing strengthened speculations of another round of QE in their next policy meeting in July. However, both the developments failed to trigger much movement for the GBP/USD pair and cable remained pretty much range-bound on the day though it had hit an intraday high of 1.5650 on profit booking. The US economic data was mixed with the Case-Shiller home price index rising 0.7 percent in May though consumer confidence reading printed softer than estimated. US durable goods data is due from the other side of the pond though Europe will be the catalyst for movements in the market. The GBP/USD opens at 1.5624 this morning.