EU bailout fund fails to reach target level as Euro remains pressured

Tom Tong20/Dec/2011Currency Updates

GBP

Sterling yesterday rose to within a hair’s-breadth of the 10-month high it achieved against the Euro last week, as the single currency was weighed down by worries over possible downgrades to the sovereign credit ratings of eurozone nations.Sterling was propelled higher against the Euro last week by its “semi-haven” status amid the Eurozone debt crisis

However, the pound’s advance may reduce slightly Scottish and other UK exporters’ competitiveness in markets in the 17-nation Eurozone, at a time when the domestic manufacturing sector is already under severe pressure. Manufacturers are being hit by weak orders from a UK economy viewed as in significant danger of going back into recession, and by a more difficult export climate

EUR

The threat of euro-zone sovereign credit downgrades weakened the Euro Monday, as fears of skyrocketing European borrowing costs counterbalanced efforts by the 17-nation currency bloc to stabilize its debt crisis.

Analysts worry that with Europe’s debt problems still unresolved, a ratings downgrade of a major euro-zone economy is more a question of if and not when. Late Friday, Moody’s Investors Service cut the sovereign rating of Belgium, which heightened expectations that Standard & Poor’s—which recently placed 15 of 17 euro-zone countries on negative ratings watch—could soon take action of its own.

European finance ministers yesterday said they will boost their anti-crisis efforts by pledging 150 billion Euros to the International Monetary Fund. Four countries not using the single currency also agreed to add to the IMF war chest while Britain refused to commit funds, a sign of the difficulty of attracting outside cash to ease the Euro area’s debt burdens.

German business confidence may have weakened in December for the fifth time in six months. The Munich-based Ifo institute’s business climate index, based on a survey of 7,000 executives, is expected to fall to 106 from 106.6 in November, according to the median estimate of economists in a Bloomberg News survey before the data is released today at 9.30.

USD

At the market open this morning GBP/USD is rallying close to yesterday’s high of 1.5545. The fact that the UK wasn’t involved in yesterday’s €150B deal with the IMF takes some pressure off the Pound with many expecting the Dollar to be sold off in the run up to Christmas as market liquidity drops and traders square off positions.

Elsewhere yesterday the Richmond Federal Reserve Bank President Jeffrey Lacker made abundantly clear that he is not prepared to support further easing of monetary policy, at least as long as the economy maintains its meagre projected growth pace and inflation stays at the top of the Fed’s target range. Earlier, in prepared remarks, Lacker had warned that the Fed cannot hope to spur stronger economic growth or reduce unemployment through additional monetary stimulus without running the risk of causing accelerated inflation. There is very little news out of the US today as data releases thin in the run up to Christmas with only the building permits and housing starts numbers expected this afternoon.

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Written by Tom Tong

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