Safe havens prosper as Euro debt crisis continues

Tom Tong14/Sep/2011Currency Updates

GBP

The Pound fell to a 7 1/2 month low against the U.S Dollar during Tuesday trading suffering off the back of renewed concerns the Bank of England may opt for further quantitative easing. Inflation data published on Tuesday, albeit in line with expectations, has added weight to the argument for the Bank of England to add further stimulus to the economy, with policy-maker Adam Posen in full support or additional QE. Annual CPI picked up by 4.5% in August from a previous reading of 4.4% in July however this has not impacted on investor sentiment that interest rates will stay at record lows for a prolonged period of time in 2012. The U.K trade deficit has also shown its widest reading since December 2010 which highlights that a weak Pound is not bolstering an export led recovery. The Pound has not been helped by the European debt worries with large concerns over U.K banks’ exposure to euro zone debt. Today’s key data from the U.K comes from the employment sector where we expect to see a slight increase in the claimant count rate for August combined with a drop in average earnings for July.

EUR

The Euro weakened to its lowest level in a decade against the Japanese Yen and fluctuated against the Pound and U.S Dollar as speculation Greece is nearing a default intensified. The Euro also sold off following on from an Italian debt auction which saw borrowing costs soar at a sale of 3.9 Billion Euro’s worth of bonds. Having pared back some losses against the Dollar and Pound in the morning the Euro fell in the afternoon session after a spokesman for French President Nicolas Sarkozy stated no joint initiates with German Chancellor Angela Merkel on the debt crisis will be announced today. The markets are largely being driven on risk appetite and safe haven demand and with no clear resolution on the debt crisis in sight the Euro looks vulnerable to further losses in the short term. The major data out of Europe today is the Industrial production figure for July which is anticipated to show an improvement to 1.5% from a previous reading of -0.7%.

USD

The Dollar strengthened notably against the Pound on Tuesday hitting over 7 month highs as safe haven flows increased following on from the concerns over the European debt situation. We had a distinct lack of key economic data out of the U.S on Tuesday and therefore the market traded in line with risk sentiment which is heavily benefiting the dollar at this stage. The key data out of the U.S today is the Retail Sales reading for August which is anticipated to show a decline in consumer spending month on month to 0.2% from a previous reading of 0.5%.

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Written by Tom Tong

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