Markets focus on the outcome from Wednesdays EU summit as Sterling touches monthly high

Tom Tong25/Oct/2011Currency Updates

GBP

Sterling retreated from a six-week high versus the dollar on Monday as uncertainty over whether euro zone policymakers would be able to agree on a plan to tackle the region’s debt crisis weighed on perceived riskier currencies.

The downturn in risk appetite prompted market players to take profits from an earlier rally in the pound. The pound had gained in early trade along with the euro and global stocks on cautious optimism European leaders would be able to hammer out a solution to the debt crisis over the next few days. At a summit on Sunday, the EU neared an agreement on bank capitalisation and Germany and France came closer to a deal to leverage the euro area’s rescue fund.

But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government debt will have to book. Speculators have cut bearish bets against sterling but they are still significantly short on the UK currency and bullish on the safe-haven U.S. dollar.

Many investors see limited upside for sterling in coming months after Bank of England policy committee minutes last week hinted that more quantitative easing may be needed to prop up the UK economy.

EUR

All eyes are on the EU summit tomorrow where it is believed Eurozone ministers are planning on boosting the bailout fund to try and save Italy, Spain and of course Greece. Talks began yesterday where Italy appeared to be the laughing stock with Merkel and Sarkozy raising a rye smile over the nations Prime Minister Silvio Berlusconi and their flailing finances. They were told that immediate action is needed to impose austerity measures ahead of tomorrows meet.

The expected bailout fund is expected to be bolstered to around 1 trillion Euro’s in order to increase spending power without any cost to the governments. One of two methods is thought to be instigated. Either, use the money to buy up sovereign debt or to take the hit on the first 20% of Italian and Spanish government bonds.

Hope that an agreement will be reached tomorrow di push stocks to a seven week high, however fears of recession have seeped back into the markets, some believing that it has already begun.

USD

The short term outlook on regarding the greenback remains to be positive as US markets saw stocks rally yesterday as investors continue to view the dollar and the economy as a safe heaven as uncertainty still lingers regarding a possible double dip recession. The American market was aroused further in a day of trading as investors got news of a big-money takeover talks as Caterpillar posted recorded results and continue to cement their position as the world’s largest heavy machinery manufacturer.

Today’s news see’s the US releasing monthly data on the US housing price index and consumer confidence as the government and Fed begins to review the refinancing program to help homeowners and borrowers who owe more then their properties and continue to balance and manage US expectations.

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Written by Tom Tong

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