Political chaos in Greece as Europe considers a Greek exit, market digests EU rate cut ahead of Non Farm Payroll Figures

Tom Tong04/Nov/2011Currency Updates

EUR

The common currency was volatile for most of Thursday on speculation that Greece’s government was on the brink of collapse and a referendum on a bailout that is crucial for it to avoid default would likely be scrapped, coupled with the ECB’s surprise cut of interest rates by 25 basis points, to 1.25%. Yet towards the end of the day the euro yesterday advanced after Papandreou scrapped a referendum on an accord with the European Union after it split his party, caused turbulence in the markets and drew warnings from euro leaders that it may cost Greece its membership in the 17-nation currency area.

The fast-moving events in Athens overshadowed the first day of a summit of the Group of 20 major economies on the French Riviera on Thursday, with anxious world leaders urging Europe to act to stop contagion from its sovereign debt crisis.

Papandreou bowed to cabinet rebels and agreed to step down and make way for a negotiated coalition government if his Socialists back him in a confidence vote on Friday, government sources announced.

GBP

As BoE board member Charles Bean casts a weakened outlook for the U.K., there could be a greater push to expand the asset purchase program beyond the GBP275B target, and the central bank may have little choice but to carry its easing cycle into 2012 as the economy faces a growing risk of slipping back into a recession. The UK currency was barely changed after lower-than-expected UK services sector PMI data. The headline index fell to 51.3 in October from 52.9 a month earlier and well below a forecast of 52.0.

Despite the latest bounce, analysts said prospects for the UK currency are skewed towards the downside with academic think tank the National Institute of Economic and Social Research lowering growth prospects.

The Monetary Policy Committee will meet next week and chances are it could consider more easing.

USD

For all the turmoil in the eurozone – and an unexpected interest rate cut by the European Central Bank – it is actually the US dollar, rather than the euro, that looked the more vulnerable of the two currencies.

With the Federal Reserve looking to extend support for the US economy amid growing fears about another slide into recession, strategists say the prospect of further monetary easing by the Fed in the new year would weigh heavily on the dollar. Further, Federal Reserve Chairman Ben S. Bernanke said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy warrants further easing.

The dollar held a two-day drop versus the euro before data forecast to show U.S. jobs growth slowed and the unemployment rate remained unchanged, supporting the case for the Federal Reserve to consider monetary easing. Europe’s common currency climbed versus the greenback yesterday, paring this week’s drop, after Greek Prime Minister George Papandreou signalled he won’t call for a referendum on a bailout plan – increasing risk sentiment.

Today we are expecting the all-important Non-Farm Payrolls.

If we get a better-than-expected payrolls result, but it’s not good enough to bring the unemployment rate down, then that will probably keep expectations that there may be further policy easing down the track alive. That will hurt the US dollar.

Further data expected today are the unemployment rate and Average Hourly Earnings. We are also anticipating FOMC member Tarullo’s speech, which could give some indication to the Fed’s intentions.

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Written by Tom Tong

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